A Note on Some Recent Misinterpretations of the Cantillon Effect
Abstract: Book (2019) claims that Austrian economists attach too much weight to Cantillon’s discussion of monetary redistribution, while Sumner (2012a, 2012b, 2012c) argues that it makes very little difference how new money is injected. In this note, I critically review these arguments, finding that they are unconvincing. The Cantillon effect matters, and the Austrians correctly analyze it.
inflation — central bank monetary policy — austrian economics — cantillon effect
JEL Classification: B11, B53, E31, E51
Arkadiusz Sieroń ([email protected]) is assistant professor of economics at the Institute of Economic Sciences at the University of Wroclaw, Poland.
It may seem that the Cantillon effect is an easy-to-grasp and noncontroversial concept.1 After all, the observation that helicopters do not drop money and that money goes into the economy in an uneven manner—that is, some people get new money earlier or get more of it—should not elicit doubts. However, almost two hundred years since its formulation, the Cantillon effect still causes a lot of confusion. The most recent example is Joakim Book’s article “The Mythology of Cantillon Effects” (2019), in which he argues that the weight some Austrian economists “attach to Cantillon’s monetary redistribution is greatly exaggerated.” Another case is Scott Sumner’s series of blog posts (2012a, 2012b, 2012c) in which he claims that it does not matter how money is injected into the economy. The aim of this brief note is to critically review Book’s article and Sumner’s posts.
II. BOOK’S MYTHOLOGY OF CANTILLON EFFECTS
Book acknowledges that “by introducing new money into the system, early receivers are benefited at the expense of late receivers.” However, he points out that Cantillon’s analysis of monetary redistribution is based not on central bank fiat money, but on a gold standard: “For Austrians, usually strong proponents of hard money, commodity-money regimes, and monetary policy rules, it is ironic that the monetary-redistribution analysis that so endeared him to Austrians is based entirely on a gold standard.”
Hence, the alleged problem with the Austrian view is that it incorrectly considers the Cantillon effect “a fundamental evil unique to fiat central bank systems,” while in reality “every monetary system includes Cantillon effects.” Book has it right that “Cantillon effects are universally valid occurrences of any monetary economy.” But his claim that Austrians are not aware of this fact is false. Surely, the first-round effect is a result of any uneven increase in money supply, but that does not mean that the Cantillon effect is irrelevant or that various possible ways in which the money supply in a given economy can be increased have the same results.
On the contrary, the great merit of the Austrian school is to notice that there are differences in the outcomes of monetary inflation, depending on its variant—in particular, whether new money is introduced into the economy through market or nonmarket channels. As I point out in my book Money, Inflation and Business Cycles: The Cantillon Effect and the Economy, in the former case,
money supply increases as a result of voluntary activities of market participants involved in the production of money (or its transfer from abroad) under private ownership. Market production of money is undertaken for profit, which can take place on a completely unhampered market only by adequately meeting the needs of the money users, as a result of providing an appropriate amount of universal medium of exchange of appropriate quality. This means that such production has a balancing effect. If the increase in money supply is too big, prices will rise to the point where the purchasing power of the money produced will drop to the level at which fu
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