James Steuart on John Law: the formation of monetary analysis

Jean Cartelier (Université de Paris-Ouest, EconomiX)

Steuart devotes twelve chapters of his Inquiry to the « System » John Law has implemented in France at the time of the Régence. His position, unique for the 18^th century to my knowledge, may be summed up as follows:

1. Had the many non-desirable and various monetary manipulations not taken place, especially the disastrous 21^st of May 1720 arrêt, the “System” would have been viable and would have performed rather well
2. Law and the Regent did not intend to defraud the public
3. The French monetary theories of the time (Dutot, Melon and Montesquieu) are partly responsible for the failure of the “System”

Understanding Steuart’s position is the purpose of the paper. More precisely, the point is whether Steuart’s sympathetic attitude  to Law may be attributed to the peculiarities of the “System” or rather to a deep similarity of their general theory of money and credit and beyond to their common vision of what economics is about. The latter view is defended in the paper.

Steuart’s historical analysis of the “System” is briefly recalled with the view of finding out the points on which Steuart and Law agree or disagree. But such an exercise is not sufficient. We have to resort to Law’s theoretical writings in order to understand the theoretical foundations of the “System”. A comparison with Steuart’s theory shows how close are the theoretical positions of both authors and how far from those of their contemporaries.

Amongst these topics, we shall retain:

• Money and division of labour are the two sides of the same coin (there is no logical priority of the latter)
• The strategic importance of the nominal unit of account, independently of any reference to whatever commodity
• Quantity of money is endogenous and has a great influence on the level of economic activity
• The value of money depends on the wealth against which it has been issued (not only precious metals and land) and may differ from that of the means of payment (which explains why Steuart may approve the principle of the “System”).

What is at stake is not a pure academic issue in history of economic thought; Law and Steuart appear to be two important milestones in the process of constitution of the paradigm called later monetary analysis by Schumpeter, paradigm opposed to real analysis or value approach; according to Schumpeter this opposition is the main cleavage in economic analysis