Over the
last week there has been a flurry of exchange between Austrian economists
Murphy and Horwitz and market monetarists Sumner, Rowe, and Woolsey over the
Cantillon Effect as mentioned in Sheldon Richman's article in The American Conservative. The good news is
that progress has been made in the argument . The Austrians have done a good
job of recognizing certain deficiencies in the simple, vulgar reading of the
Cantillon Effect, and some of the opposition has acknowledged the refinement of
the position. I'm specifically referring to one response from Sumner and the
post that I linked to for Woolsey. This is a postitive development, but it has
overshadowed Richman's main argument: elites use government to increase their
own wealth and power and in the process make class structure more rigid.
Richman
concentrates on government as a mechanism for wealth reallocation. Such
involvement opens up substantial rent-seeking opportunities. As he describes in
his article, "It was these [19th century, French] laissez faire radicals
who pointed out that two more or less rigid classes arise as soon at the state
starts distributing the fruits of labor through taxation: taxpayers and
tax-consumers." While rents can be distributed directly - i.e., handouts
gathered through taxation - they can also be distributed indirectly through
inflation and the ensuing relative price changes. Investors who correctly hedge
against expected inflation receive a portion of these rents. In this way, the
Cantillon Effect is pertinent to the discussion. So far, the debate has done
little to address this point.
Within a
market, actors have incentives to increase their wealth holdings. This is
complicated when government interferes through monetary manipulation, trade
regulations, granting of labor monopolies, and any other action that transfers wealth from group A to group B by the use or threat of force. Impediments to
collective action among large groups provide an opportunity for small groups to
engage in rent-seeking behavior. Whether or
not intentional, this leads to oppression of the poor by the rich. I need only
cite a few examples. Young and unskilled workers - often those who are from the
most disadvantaged of social groups - are kept out of the work force by labor
union supported minimum wages and other labor market restrictions. Recently, a
large number of middle and lower class Americans were economically crippled
when, after buying houses that were overpriced due to politically driven
incentives, the housing market collapsed. And, as Richman points out, wealth is
redistributed from the poor to the rich due to inflation as the wealthy "are
far better positioned to hedge and recover than workers who are laid off from
their jobs." Some of the elite might face major losses as the effects of
the policies work against their interests, but the general effect is to
disempower and even confuse ordinary men and woman as the wealthy collect economic and
political power by the generation of these crises small and large.
There is
an important question that needs to be considered in analyzing the
redistribution of wealth and power. How much of this is intentional? Are the
wealthy overtly attempting to politically and economically castrate the middle
and lower classes? There might be some elites out there that think in these
terms, but I am inclined to take into account the incentives of the system
rather than begin with accusations of conspiracy. If social systems encourage voluntary
exchange, parties will attempt to better themselves through voluntary exchange.
If it encourages the use of force to redistribute wealth, individuals will
attempt to gain by taking advantage of government coordinated wealth transfers.
The latter implies the use of force and is, is at best a zero sum situation. More
often, the costs of the transfer lead to a net loss of wealth. The more powerful the government, the greater
the incentive for individuals and organizations to use the latter strategy to
accumulate wealth and power. This is the message that has been overlooked. This
is a cry against tyranny that should not be ignored. I am glad that the
aforementioned economists have partaken in a fruitful discussion concerning the
Cantillon Effect, but lets not forgot the context within which it was
mentioned.
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