Cantillon Effect

Sometimes I sit a few cars back at a stoplight that has just turned green and imagine how efficient it would be if we could all trust each other to accelerate at the same moment at the same rate. The light could turn green and we could all press the gas pedal without running into each other. The way it works now (and I am not interested in any technologies or systems that would enable or enforce my vision), the second car watches the first car for movement instead of the light for color. The third car must wait for that to happen and the second car to start moving in response to the first. It's a chain reaction. Not synchronized. 

Inflation usually works like our chain reaction. First more dollars are introduced to the system (unbacked by increase in production of goods or services). Someone reacts to this influx of purchasing power by increasing demand on something. The producer of that thing raises their prices. They then have more dollars with which to demand the resources they use to produce. Those resource providers raise their prices, and so on. Buyers who did not yet receive a share of the influx of money, but compete to buy the same resources, need more dollars to buy those same goods or services. So they react by raising their prices to whomever is buying from them. The people at the end of the chain lose. 

Or, since money is not usually dumped into our system secretly, the people at the ends of the chains could raise their prices without waiting for the series of reactions. It's like putting on the gas when you see the light turn green. I acknowledge there is some risk that for whatever reason the buyers of your labor or product will not recognize the appropriateness of this action and may decide not to do the trade, so it could be analogous to rear-ending the slower car in front of you. Maybe it would be wiser to wait until the first or second car have gotten moving - people are noticing increased prices in some spheres and so will be readier to accept your higher prices before the reaction technically trickles down. 

If you are far down the chain and wait until the dominoes hit you, all the earlier dominoes will have had more purchasing power for months or years, and thus will have a strong economic advantage. It could be so strong as to devastate your investments, keep you from buying a house with money you saved - not just make it harder to buy the newest iphone. 

I was telling my mom about this economic reality - advocating that the business we work for not wait for the chain, but raise prices (and wages) early, and stalwartly defend the decision by educating any unreasoning customers. But it is only tonight that I discovered the winners at the front of the chain, losers at the end effect has a name: the Cantillon Effect.

I read a substack article about the economic rule and its creator, Richard Cantillon. (Disclaimer - the article linked contains some coarse language.) Among other things, the author, Matthew Crawford, points out, "Note also how the American economy benefits from this system at the expense of the rest of the world. By virtue of being closer in economic relationship to the money printers, most Americans win, or lose small enough..." I encourage you to read it (even if you skip the formula and don't spend too much time deciphering Jargon or looking up names). The Cantillon Effect is Currency Slavery

One way, not mentioned in the article, to reduce the power of the Cantillon Effect is to have a higher percentage of things produced and services rendered be non-transactional. Grow your own food. Neighbors help neighbors fix their fences, or get rides to the airport. Make meals for widows. Grandparents and aunts and uncles and friends mind children. Have enough people in your household to care for your home: mowing, shoveling snow, cleaning, weeding, painting, minor repairs. Preserve what you have through maintenance or carefulness. The less you are using money, the less power inflation has over your life (and wealth).

To God be all glory.