Does it make any difference how money is injected into the market? Sumner and the Cantillon Effect

At The Money Illusion a long and interesting discussion is still taking place around a post by Scott Sumner on monetary effects after a monetary injection of money into the market. Sumner takes on a quote by Sheldon Richman where he says that the Austrian school has (1) distinctively paid attention to the fact that money enters into the market through specific parts and not “as it falls from an helicopter” and (2) that money is non-neutral. Sumner argues that the non-neutrality of money is one of the most studied topics in monetary economics and that it is unimportant how money gets into the market. In the comment section (which I also recommend to read) David Henderson asks “Scott, Just so I can make sure what you’re saying: are you denying Cantillon effects?” Scott’s answer: “Yes.” I think there’s some true in Sumner comment, but also some shortcomings that overlook the presence of Cantillon Effects.

Sumner offers the following 4 examples of how money can be injected in the economy:

  1. Newly injected base money is used to buy T-bonds from banks.
  2. Newly injected base money is used to buy T-bonds from non-bank securities dealers.
  3. Newly injected base money is used to buy T-bonds from individuals at a special auction excluding bond dealers.
  4. Newly inject base money is used to pay the salaries of government workers, and as a result less money is borrowed by the Treasury. The Treasury then creates and donates a T-bond to the Fed.

Since in all cases money has a direct and fast effect on T-bonds, it is indifferent how money is injected in to the economy. If directly to banks, to individuals or through the government. In all cases T-bonds and interest rates are affected first.

There are three things I want to mention.

First, it may be true that these 4 points are an accurate description of how changes in money supply happen in contemporary United States. It may also be true that an increment in money supply is done by buying financial assets at market prices rather than being a free gift of purchasing power. But none of these facts go against the presence of the Cantillon Effects.

Some ones, and not others, see their cash balances increased when the Fed decides to expand money supply. Those some ones are the ones spending the new cash first. Even if we accept this (as Sumner seems to do in the comments sections), there still are Cantillon Effects that can produce long-term non-neutral effects (short discussion here). What would be required for the Cantillon Effects to be absent?

Homogeneous and correct expected inflation is one of the requirements. If all agents know that inflation will be 3%, then they know now much prices will rise. This is a necessary but not a sufficient condition. If I’m an entrepreneur it doesn’t help my business to increase the prices 3% today if my clients still don’t have the extra 3% of money that’s in the economy. To avoid Cantillon Effects the money helicopter is needed in addition to the correct homogeneous inflation expectations. In other words, to argue against Cantillon Effects we need to assume the helicopter. We can indeed imagine a world scenario with such characteristics, but is not one that loyally expresses the problem of monetary policy and changes in money supply.

Second, what would a charitable interpretation (and what I think Sumner is trying to say) of Sumner’s post be? It is not that there are no effects but, that given the institutional and market framework, anyway money is injected into the economy produces the same effects. It is different, however, to say that there are no Cantillon Effects than to say that all money supply produces the same Cantillon Effects. Nonetheless, even if all 4 cases come to produce the same affect on the price of T Bonds, it still has a bearing in the market how the second step of money expansion takes place. It is not the same to call on Richman because one considers he made an analytic mistake than to call on Richman due to a different assessment on the empirical extent of the Cantillon Effects. All 4 cases can present the same first-step Cantillon Effect, but the second and following changes do differ from case to case.

Finally, an academic critique of Austrian theory should be based on academic work, not on media or blog posts. Not that this is what Sumner is trying to do on his post (maybe, maybe not). But it did bring back to my mind the too common rejection of all Austrian economics based on bad economic blogging and conveniently overlooking the academic output and contributions of the last hundred years.

5 comentarios en “Does it make any difference how money is injected into the market? Sumner and the Cantillon Effect

  1. Excelente Nicolás!!

    Algunas cuestiones:

    1. Sumner enfatiza un supuesto: que la política fiscal no cambia. Por qué? En qué cambia si, por ejemplo, se expande?

    2. Por qué destaca la compra a precios de mercado? Si yo vendo un producto a 10 pesos y hay expansión monetaria y me compran mi producto primero, a precios de mercado, en el mediano plazo el dinero pierde poder adquisitivo pero yo compré primero a los precios «viejos» y me regalaron poder adquisitivo… ergo, no entiendo qué quiere decir con que no-es-importante-por-dónde-ingresa-el-dinero-porque-los-Tbonds-se-compran-a-precios-de-mercado.

    3. También Bob Murphy comentó en la entrada y, creo, que expuso muy bien el argumento de Sumner: y después le pone un poco de humor en su blog

    Yo realmente no entendí a dónde apuntaba SS porque si se niega el Efecto Cantillon, entonces no veo cuál es el problema de la inflación ya que «the impact on the purchasing power of various groups in society is virtually identical». A menos que, como explicás bien vos Nicolás, lo que quiera negar SS sea que haya mucha diferencia entre si el dinero entra por B o por A, sin negar que, entre por donde entre, el Efecto Cantillon existe.

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  2. 1-. I’m not sure he’s point should be affected. I guess it’s just to emphasize the ceteris paribus of his argument.

    2-. He’s arguing against the belief that monetary expansion is a free gift by the Fed. That should not run against Cantillon Effects. But the underlying point is that the monetary policy is a swap of assets in the balance sheet of the banks, therefore there are no wealth effects. He is not explicit about this though. Nonetheless, the composition of balance sheet is changing due to the Fed’s monetary policy.

    3-. I think Bob rightly corners Scott in the Cantillon Effects problem. But I don’t think that Sumner is trying to deny Cantillon Effects as he’s trying to deny «different» Cantillon Effects if monetary is injected through different channels. I don’t know how to make sense of his denial of Cantillon Effects with this other comments acknowledging that whoever receives the new cash is better off.

    Yes. I think he’s making an (unclear) empirical argument. Even if he’s right in criticizing Richman, I don’t see the overall problem with Richman’s argument. After all, in all cases presented by Sumner interest rates are changing.

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  4. Me parece que SS no comprende el Efecto Cantillon. Y no es culpa suya, ya que la profesión todavía no lo comprende, además de que este efecto recibe diversas lecturas en la literatura. Sintetizar esas diversas lecturas, podría requerir un nuevo ensayo.

    A quien interesa la no neutralidad, sólo les dejo este artículo:

    The principle of the non-neutrality of money. A response to Dr. Humphrey, Procesos de Mercado, Revista Europea de Economía Política, Volumen VIII, No. 2, Otoño de 2011, pp. 263-284.

    Haz clic para acceder a ravier-the_non-neutrality.pdf

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