June 19, 2019 Reading Time: 4 minutes

Inequality is possibly the buzzword of our day, having been called “the biggest challenge of our time” by the likes of Oxfam and being seen across the political spectrum as one of the most crucial issues today. It is argued that our economic – supposedly capitalist – system would lead to more wealth for ‘the rich’ to the detriment of ‘the poor’ and ‘the middle class.’ It would lead to less mobility between different classes as well as possibly even cultural disintegration, for instance like the urban-rural divide which is seen with dismay by conservatives.

There are countless proposals to tackle inequality, however exaggerated it may be, though they all have one thing in common: the government needs to do more. Taxes should be increased or new ones introduced for ‘the 1%,’ for those having inherited too much wealth, for corporations, or ‘Big Tech’. All of them should finally pay their ‘fair share.’ More welfare should be provided for ‘the poor,’ for families, for single moms. Cities left behind would need to receive more funding from D.C.

What is easy to overlook in this frenzy for money is that the government plays a significant part itself in initiating inequality. After all, rather than living in a capitalist system, we instead often live in a system of cronyism. Companies are courting for more subsidies (see Amazon’s HQ2 hunt or Tesla as just two prominent examples), are arguing for regulations that would hurt their competitors, or even make life tougher for the Average Joe (for instance, the Average Joe who is writing this article is unable to visit pages like the Chicago Tribune or Los Angeles Times because the EU introduced a “data protection” law for consumers last year that, in reality, major corporations primarily benefit from).

Even worse, when it comes to inequality, central banks – regardless of whether it is the Federal Reserve, the European Central Bank (ECB), or the Bank of England – have contributed to the problem. These behemoths, in charge of monetary policy, have been on a spending spree ever since the financial crisis of 2008 with so-far unconventional monetary tools, with bond purchasing programs and one round of Quantitative Easing after another.

In classical, standard economics, it is assumed that these money-printing processes will merely stimulate economic activities, otherwise being neutral. The assumption of money neutrality says, according to Ludwig von Mises, that “changes in purchasing power were brought about simultaneously in the whole market and that they affected all commodities to the same extent.” That is, everyone is affected by monetary expansion in the same way. But, argues Mises, this assumption is also a fallacy.

As a largely-forgotten economist with the name of Richard Cantillon – the few who have heard of him often frantically attempt to pronounce his name in a French way, despite him having been Irish – pointed out, when new money is introduced into an economy, as it has happened on a massive scale over the last decade, it is not neutrally introduced at all.

In the words of the man himself, “by doubling the quantity of money in a state, the prices of products and merchandise are not always doubled. The river, which runs and winds about in its bed, will not flow with double the speed when the amount of water is doubled. … Market prices will increase more for certain goods than for others, however abundant the money may be.

The money enters the economy at a certain point – in our central banking system, at processes close to the central bank – and then trickles through the economy. Thus, it is being more beneficial for some than for others. Those that receive the money first will still face the market at its old, non-inflated prices, but with the new money already at hands. They can use it to their advantage. These first-receivers are, in our world, those well connected or close to central banks: commercial banks, financial institutions, big corporations, governments, and bureaucracies. Meanwhile, those farthest away from the money production will lose out. In our world, these are those lower on the economic ladder and those that are less politically connected.

Relatively little research has been done on whether the Cantillon Effect is actually holding up in reality. Michele Lenze and Jiri Slacalek argued last year that the monetary policy of the ECB had no significant effects on income distribution. The paper was sponsored by the ECB itself, however, and reeked of Keynesian assumptions, such as that the ECB’s Quantitative Easing led to unemployed getting jobs, thus, obviously, raising their income (that it was loose monetary policy that got us into the crisis and led that high unemployment in the first place is not considered).

Meanwhile, a brand-new study by Mehdi El Herradi and Aurélien Leroy from De Nederlandsche Bank, which looks at twelve industrialized countries from 1920 to 2015,  shows some strong results in favor of Cantillon: “our evidence suggests that monetary policy has a significant impact on income inequality.” Indeed, they argue, loose monetary policy results in much higher income for ‘the 1%’ – their share of income could increase between one and six percent.

Needless to say, such empirical studies on large-scale economic processes – by using intricate mathematical models, need to be observed cautiously. In addition, much more work needs to be done in the field to make more comprehensive statements. Despite this, this new study from the Netherlands gives a sign – a sign backed up by rapidly rising prices in stocks, financial assets, and housing, i.e. of goods in which wealthy people are mostly economically active – that the Cantillon Effect could indeed be in effect today.

A rethink, thus, might be in order among those particularly invested in fighting against inequality. They would do well to look more often to central banks and governments, which redistribute money from those that are poor to those that are rich, to find those guilty of contributing to inequality.

Kai Weiss


Kai Weiss is a Research Fellow at the Austrian Economics Center and a board member of the Hayek Institute. His main research interests are political philosophy, European politics, and technology, and his works have been published in various outlets, including CityAM, CapX, The American Conservative, and the Mises Institute. Follow him on Twitter.


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