Right or Wrong on Cantillon Effect, Richman is Right

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.