The Cantillion Effect – Adam Smith Institute
The Cantillon Effect describes how new money injected into an economy does not affect all prices evenly; those who receive it first benefit at the expense of those who receive it later, distorting economic structures and causing malinvestment.
Background
- Richard Cantillon (1680s–1734) was an Irish-French economist whose 1755 *Essay on the Nature of Trade in General* introduced ideas that later influenced Adam Smith and the Austrian School.
- The "Cantillon Effect" describes how an increase in the money supply doesn't affect all prices uniformly or simultaneously. New money enters the economy at specific points (e.g., banks, government contractors) and those who receive it first benefit before prices rise broadly, while those who receive it last (e.g., salaried workers) see their purchasing power eroded.
- This concept is central to Austrian business cycle theory and is often invoked by critics of central-bank "money printing" (quantitative easing) to argue that such policies create hidden wealth transfers and distort investment.
- The Adam Smith Institute is a UK free-market think tank that publishes analyses from a classical liberal / Austrian economics perspective.