John Law and Richard Cantillon on the circular flow of income

Abstract

This paper aims to demonstrate that John Law has a prior claim to both Richard Cantillon and Francois Quesnay as the originator of the circular flow of income and expenditure. Law's use of an island model in chapter VII of Money and Trade (1705) shows the circular flow process amongst three socio-economic groupings-landlords, farmers and manufacturing workers. It seems likely that Cantillon's analysis of the circular flow process may have been inspired by Law's earlier work. Law used the circular flow process to show the importance of what is now termed the money in advance requirement for an economy suffering from unemployment and underutilization of resources. Richard Cantillon, who, as a banker in Paris during 1719/20, had profited enormously from the excesses of Law's Mississippi System, used it to examine the equilibrium amount of money needed in an economy where resources were fully utilized and the way in which over expansions of the money supply would have adverse balance of payments and inflation...