Inflation: What Is the Cantillon Effect and How Is This Theory Important for Our Economy?

Have You Ever Heard of the Cantillon Effect? Richard Cantillon Was a Franco-Irish Economist Known for the Cantillon Effect and Author of the Great Book Essai sur la Nature du Commerce en Général (Essay on the Nature of Commerce in General). Cantillon Made Significant Contributions to Economics, with His Main Work Essai sur la Nature du Commerce en Général.

His Contributions to the Cantillon Effect Include: His Causal Methodology, Monetary Theory, His Concept of Entrepreneurs as Risk-Takers, and the Development of Spatial Economies.

The Writings Had a Major Influence on Key Figures in the Development of Economic Thought, Including: Adam Smith and Prominent Figures of the Physiocrats Anne Turgot and François Quesnay. I Could Dive Deeper into the History of This Important Thinker, But I Will Focus on One of His Most Important Theories, the Cantillon Effect.

The Cantillon Effect in Practice and Its Use in Current Economics

The Name of the Cantillon Effect Is a Tribute by Blaug to Richard Cantillon, the Creator of the Theory. It Turns Out That, Contrary to What Many Believe, Prices Do Not Automatically Rise When the Money Supply Increases, Much Less by an Equivalent Amount.

What Really Happens Within the Cantillon Effect Is That the Purchasing Power of Those Who Receive the New Money First Temporarily Increases, While the Purchasing Power of Those Who Receive the Money Last Decreases a Bit.

The Purchasing Power of the Person Who Receives the Money Will Be Greatly Reduced. Prices Also Do Not Rise as Uniformly as Many Think, Because Those Who Receive Their Money First Spend on Specific Goods, Causing the Prices of Some Goods and Services to Rise More Than Others.

The Global Economy Has Endured More Than a Decade of Aggressive Monetary Policy – a Policy That Has Yet to Prove Effective Due to Central Bank Interventions and the Lack of a Clear Solution to Exit the Crisis. Add to That Half a Century of Fiat Currency, and the Impact of Any Action on the Supply and Demand for Money Is More Important Today Than Ever.

Many People Believe in the Neutrality of Money, Which Means That Money Does Not Affect the Economy in the Long Run. This Is Very Much Contextualized by Some Authors, and for Me, What We Should Be Thinking About Is the “Dynamic Neutrality” of Money: Initially, It May Not Affect Things, but in the Long Run, If the Injection of Money into the Economy Is Too Large, It Is Almost Impossible Not to Have Adverse Effects in the Future.

In a Way, the Cantillon Effect Is Quite Direct. It All Starts with an Increase in the Money Supply – as We Are Seeing Now with Jerome Powell and the Fed’s Digital Prints – and Who Receives the Money First.

The Addition of Money Changes the Distribution of Income in Favor of Those Who Receive the New Money First – In the Current Case, Large Cooperative Banks and Corporations Holding Corporate Bonds Are Somehow Being “Bailed Out” by the Federal Reserve. Cantillon Noted That If the New Money Reached Savers, Interest Rates Would Drop, but If the New Money Reached Consumers, Interest Rates Would Rise, as Entrepreneurs Would Need to Take More Loans to Meet the Growing Demand for Goods.