On Cantillon Effects

I am not going to make the effort of catching up on the whole conversation. As a policy matter, I agree with Scott Sumner: we should not be worrying about Cantillon effects. They don't seem to present the major problem. As an empirical matter, I think there's some evidence for them. The work of Andrew Young is some of the best on this. I'll be reviewing this empirical literature in my forthcoming Critical Review article on Hayek's business cycle theory. The idea makes fine sense, but we seem to have much bigger issues to worry about when it comes to the business cycle.

But a lot of this discussion has been about injection points specifically. I don't think that's the only thing to worry about. The problem with Cantillon effects is not that the government is handing money to certain producers directly. The point is that when there's expansionary monetary policy (we hope) the volume of loans expands. Certainly it expands relative to the counterfactual. And that's all that's really necessary, because the sorts of producers that borrow when interest rates are lower after an intervention are different from the sorts of producers that borrow when interest rates are higher before an intervention.

That's the theory, at least. We have to be careful about reasoning from interest rates. The point is, I think the whole issue of Cantillon effects is a lot less tied to specific injection points than it's often made out to be.

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On a somewhat related note, in my forthcoming Palgrave chapter on the basic income guarantee and Austrian business cycle theory (Guinevere Nell is editing a book on Austrian and market socialist perspective on a basic income), I note that if we were to do expansionary policy through mailing money to people you may actually avoid a lot of these issues because households will split the money between consumption and savings at whatever their MPC dictates. That seems like it would operate less through new loans than current monetary policy, which seems like it would be less prone to Cantillon effects.

I don't personally support a basic income guarantee nor am I an Austrian - I just thought the argument would be an interesting one to lay out, and while there are many chapters in the volume on Hayek and the basic income (he supported one - not for the reasons I provide), there was nothing on Hayek's macroeconomics.