In a recent email exchange, economist Robert Wenzel of Economic Policy Journal challenged me on the topic of Cantillon effects in the Modern Monetary Theory (MMT) framework. His took issue with my point that the MMT position finds Cantillon effects to be “good” (notice my use of quotation marks), and rejected it on the grounds that he could not find such claims in the new MMT textbook by Randall Wray. He replies “show me where they say or imply this.”

Allow me to qualify my position here before moving on the the crux of the issue. By “good”, I mean they desire the real effects of the increase in the money supply, i.e. the increase in employment, growth, and output. In my opinion, this is not a controversial position to take. Most economists adhere to the idea that money is non-neutral in the short-run. If MMT thinks increases in government spending, which creates money in the MMT framework, can fund public programs and legislation as well as increase economic well-being, then naturally wouldn’t it make sense to say that any increase in the money supply will create these real effects they desire? Of course.

This is where things got interesting. When I mentioned the non-neutrality of money and Cantillon effects, he replies:



Oh please, they are not even using neutral in the sense you are.

I then quote Bill Mitchell, who is co-author to Wray’s textbook on MMT and who also coined the term, from his blog:

“Accordingly, we were presented with the classical dichotomy or classical neutrality that said that nominal variables in the economy (money stock, prices) were independent of the real variables (employment, production etc) in the long-run. Extreme versions (rational expectations) later denied any relationship between the nominal and the real at any time! So the short-run was the long-run.”

Mitchell continues to call this aspect of classical theory “preposterous”. Wenzel responds in his usual impudent manner:

Sorry, Mitchell is co-author of the MMT textbook with Wray. When they discuss classical dichotomy (which is what is discussed in the Mitchell post you reference), they are referring to the idea that money is not neutral in the sense that it does impact the price level and secondly perhaps a Phillips curve role but there is nothing about Cantillon effects….

…you are totally confused. There is no indication he is discussing the time structure inherent in the capital-consumption structure. He is talking more along the lines of a Phillips curve type real impact.

So, what we have here is a distinction he makes between neutrality of money in terms of a) the price level and Phillips curve (which he doesn’t go into detail about) and b) the capital-consumption structure. If Wenzels’ claim is that MMT does not consider relative prices between the goods of different orders or the capital structure when it advocates increasing deficits to fund government spending, then I have almost no quarrel with that, although Mitchell and other MMTers have acknowledged the difference between changes in the price level and changes in relative prices here and here.

But here is Wenzel’s mistake. I claim that I am using not only the Austrian interpretation of Cantillon effects in this discussion, but am also using the actual definition of the term. He replies in typical fashion by quoting Rothbard from his book Economic Thought Before Adam Smith:

“Cantillon also provided a remarkable proto-Austrian analysis of the different effects of the money going into consumption or investment. If the new funds are spent on consumer goods, then goods will be purchased according to the inclination of those who acquire the money,’ so that the prices of those goods will be driven up and relative prices necessarily changed.”

From this email, Wenzel sees Cantillon effects being merely the changes in relative prices between consumption and investment goods. I however, see Cantillon effects as being both

Relative price changes induced from an increase in the supply of money. Real resource reallocation due to the relative price changes which causes the profitability of certain stages of production to change.

He thus omits the second and arguably more crucial aspect of what Cantillon was talking about when he spoke of the effects of monetary stimulus. If he had quoted Rothbard in full, it would become obvious that the reallocation of capital and the factors of production is the real story here. I continue Rothbard’s quote from where Wenzel left off:

If, in contrast, the increased money comes first into the hands of lenders, they will increase the supply of credit and temporarily lower the rate of interest, thereby increasing investment. (My bold)

Here we can see even Rothbard admits that it’s not just changes in credit, interest rates, or individual prices that occur, but actual resources are rearranged in the capital structure which are not aligned with actual market preferences. Investment into the early stages of production is stimulated relative to the later stages less remote from final consumption. And to take it a step further, I quote Cantillon directly from his book Essai sur la Nature du Commerce en Général:

in general an increase of actual money causes in a State a corresponding increase of consumption which gradually brings about increased prices. If the increase of actual money comes from Mines of gold and silver in the State the Owner of these Mines, the Adventurers, the Smelters, the Refiners, and all the other workers will increase their expenses in proportion to their gains. They will consume…more … commodities. They will consequently give employment to several Mechanicks who had not so much to do before and who for the same reason will increase their expenses. All this increase of expense in Meat, Wine, Wool, etc. diminishes the share of the other inhabitants of the State who do not participate at first in the wealth of the Mines in question. The alteration of the Market, or the demand for

Meat, Wine, Wool, etc., being more intense than usual, will not fail to raise their prices. These high prices will determine the Farmers to employ more land to produce them in another year; these same Farmers will profit by this rise of prices and will increase the expenditure of their Families like the others. Those then who will suffer from this dearness and increased consumption will be first of all the Landowners, during the term of their Leases, then their Domestic Servants and all the Workmen or fixed Wage-earners who support the families on their wages. All these must diminish their expenditure in proportion to the new consumption…it is thus, approximately, that a considerable increase of Money from the Mines increases consumption…. (My bold)

So we can see here that Cantillon made sure to emphasize that the increased amount of money in the economy will necessarily increase employment of both labor and capital in proportion to the increased money spent by the first receivers of it. This is not to overlook the importance of the money flows and the price changes that result from such spending, however. And while Rothbard points out that to the extent the additional money goes into the hands of lenders first increased investment, Cantillon again shows what happens when the money is received first by those wishing to use it for consumption:

If the abundance of money in a State comes into the hands of money-lenders it will doubtless bring down the current rate of interest by increasing the number of money-lenders: but if it comes into the hands of those who spend it will have quite the opposite effect and will raise the rate of interest by increasing the number of entrepreneurs who will find activity by this increased spending and who will need to borrow in order to extend their enterprise to every class of customers. (My bold)

So the main focus is that Wenzel was mistaken thinking that it’s all about the relative price changes, and that MMT desires the reallocation of resources because they implicitly assume that the economy is not at full employment and there are no resource constraints. Other Austrians agree with me on real effects such as De Soto (pg. 618), Thornton (pg. 49), and Sieron (pg. 150). The question of MMT’s acknowledgement of relative price changes resulting from an increase in the supply of money is beside the point. It’s the real effects that matter in terms of economic well-being. Wenzel, meanwhile, is too preoccupied with getting me in a “gotcha moment” when he states that my claim about MMT is not in their textbook.

This is not the point. Cantillon effects are the equivalent of the non-neutrality of money, with the addition that capital is heterogenous and multi-specific. Modern Monetary Theory may not know they are advocating for Cantillon effects in the Austrian sense, but they still favor #2 above. Thus, using Wenzel’s own words in his final email, his Austrian-lite argument on Cantillon effects has “crashed and burned”.