Cantillon effect: Who’s paying the highest price?

by
Claudio Grass
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Every time we hear government officials announce their big spending plans, their new welfare programs and their ambitious “job creating” schemes, they always present them as being in defense of the poorest and the most marginalized members of our societies. In coordination with their central bankers, they print and spend new money at will, claiming that it is all for the benefit of the weakest among us and that all the freshly created funds will support them without further burdening the taxpayer. According to them, this is the best way to prosperity and its a simple one, really: if we want to help those that don’t have enough money, why don’t we just print some and give it to them?

While the fallacy in this line of “reasoning” might be obvious even to a child, it still escapes most citizens and voters. After all, nobody likes to pay higher taxes and if there’s a painless, “win-win” way of helping out those in need, most rational actors would opt for it. The problem is that nothing in that assumption is actually true. For one thing, it is most certainly not painless. When more money is chasing the same amount of goods, prices inevitably rise and everybody loses. However, there is one very important distinction to be made here, one that swiftly invalidates the entire argument for printing and spending to help the poor: While it is true that everyone loses in the end, we don’t all suffer those losses at the same time, or in the same severity.

This phenomenon was first described and explained centuries ago by Richard Cantillon, a great economist, far ahead of his time. As Murray Rothbard put it: “The honor of being called the “father of modern economics” belongs, then, not to its usual recipient, Adam Smith, but to a gallicized Irish merchant, banker, and adventurer who wrote the first treatise on economics more than four decades before the publication of the Wealth of Nations. Richard Cantillon (c. early 1680s–1734) is one of the most fascinating characters in the history of social or economic thought.”

He examined the question of what happens in any economy when new money is suddenly injected into it. His very insightful conclusion was that the effect depended on who had control of this new money and on which point it entered the economy. Even though adding enough new money will ultimately lead to inflationary scenarios, these effects do not affect everyone at the same time. In fact, they actually benefit a minority of economic participants before they impact everyone else adversely. 

The main idea behind this argument is quite straightforward: After the new money is created, those that receive it first get to spend it and buy things at the same price levels as before. But as the fresh cash circulates further, those price levels begin to rise, and eventually, it is those unfortunate enough to be “last in line” that suffer the most from the price increases. By the time that the new funds make their way to them, even the bare necessities have become significantly more expensive, usually by a margin much larger than the new cash can cover. 

And who are those lucky enough to always find themselves in the front of the line and who push the prices up for everyone else? Well, as we saw during the Great Recession, but also as we’re seeing now, in real time, after the Covid relief fiasco and the unprecedented amounts of new money that were injected into the system, it’s the banks, the financial sector at large, and all the crony capitalist corporations that are close to governments. This is how the real estate bubble got out of control and how ordinary citizens and taxpayers ended up bailing out those who took advantage of the system. And now, the Cantillon effect is playing a massive role in the energy crisis too. It’s the poorest and the most marginalized among us that are being forced to choose between heating their homes and putting food on their tables. 

While it remains true that inflation, as a wider phenomenon, is toxic to an economy and to society at large, these nuances are important to remember. The political rhetoric that is used, especially in the West, to justify fiscal largess and monetary recklessness heavily relies on the fact that most citizens do not understand the “small print”. This is why we see so many appeals to emotion and so many “arguments” that essentially condemn anyone who disagrees with such policies as misanthrope, who doesn’t care about his less fortunate neighbors. 

Putting forward seemingly honorable goals, such as the “greater good”, “compassion” or “solidarity” is the oldest trick in the book, after all, for politicians of all stripes and convictions. It is our duty as independent thinkers and rational citizens to disperse this self-contradicting nonsense though facts and Reason. As history has clearly shown, the “greater good” is never as poorly served as it is when the State tries to meddle in the economy to achieve that end. 

Claudio Grass, Hünenberg See, Switzerland

This article has been published in the Newsroom of pro aurum, the leading precious metals company in Europe with an independent subsidiary in Switzerland. 

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