Steve Horwitz’s thoughts reinforced my own inkling that I should spell out what I had always filed away as “the Austrian point about Cantillon effects.” So the following is what I would have said, had you asked me a month ago. Note that I speak for myself, and I’m not even saying this is what Cantillon himself would have stressed:
When we’re first getting students to think about money and prices, we might say, “Imagine the stock of money magically doubles overnight. Every single piece of currency creates a copy of itself. If you had $30 in your wallet went you went to bed, you wake up with $60. Now, after everything settles down into the new equilibrium, you see the community isn’t richer. All the prices doubled.”
But once the student gets that under his belt, you make it more realistic. You point out that all prices won’t just magically double. Commodity prices rise very quickly, whereas labor contracts are more rigid. If an old widow is on Social Security, she is clearly going to lose out, whereas a magician can just jack up the going rate for his performances pretty quickly. So we see that even though “on average” nobody is changed by doubling the money stock, in reality some people benefit and some people lose.
Yet another complication is that in the real world, new money doesn’t come in via a magical increase of currency, nor through a helicopter drop. Instead the government (or the owners of gold mines in a Rothbardian world) gets the money first, and then hands it out to its cronies. The new money then ripples out into the community. It’s best to be the government, it’s second-best to be the defense contractor or Wall Street banker who get sweetheart deals, it’s third-best to be the fancy restaurant that caters to the Wall Street bankers, etc. If you’re running a deli in Boise, you’re going to see your input prices rise before your customers are able to pay more for your sandwiches. So there will be a general redistribution of wealth to the people closest to the money spigot, every time there is a new injection of money that disturbs the price equilibrium.
Finally, to the extent that this new money comes into the economy via the credit market (as opposed to a helicopter drop or, say, running the printing press to pay the Army), then one of the prices that rise early on is the price of bonds. In other words, real interest rates are temporarily pushed down, until the new injection stops and then the price system re-equilibrates. This artificially low interest rate sets off the unsustainable boom.
==> Now in the above, especially given Nick Rowe’s concession to Gene’s brilliant point, I think the market monetarist objection is not over whether injection points matter–of course they matter! If the government buys bonds versus gold versus paying opera singers, this will clearly affect people and the allocation of resources. However, the market monetarists are objecting over how these disturbances manifest themselves. Once we allow for people to anticipate price changes, they don’t have to wait to receive the new money before reacting. The traditional Austrian exposition of Cantillon effects–looking at the new money as it ripples through the economy, with the poor saps at the end of the line looking at their watches impatiently so they can start jacking up their prices–is naive. This is what JP Koning was saying.
==> The problem is, the market monetarists overstepped. Scott Sumner could have said, “I agree with Sheldon Richman, the central bank certainly can make some connected players wealthy at everyone else’s expense, for example by buying up toxic assets or taking over AIG. Clearly it matters very much where the new money is injected into the economy. However, I don’t at all like the mechanism Richman cited. He said it has to do with people getting the money at an earlier date than other people. That’s totally wrong, and here’s why…”
But no, Scott didn’t say that. Instead he wrote a post with the palpably false title, “It makes very little difference how new money is injected.” On a plain English reading of that sentence, it is false; Scott doesn’t believe it for one second. If the new money is injected into the Tomahawk missile sector versus the MBS sector versus the Treasury sector, of course it will make a huge difference. That’s why some of us flipped out and were asking Scott questions that must have struck him as an absurd waste of time.
A similar thing happened with JP Koning. He made the great point about expectations–pointing out that the canonical Austrian exposition of Cantillon effects implicitly assumes adaptive expectations–but then he ended up saying this: “On the other hand, if rational expectations are assumed from the start, then the location of gold’s injection point is moot since everyone perfectly anticipates the repercussions and adjusts.” No, of course that is wrong. If I find 10,000 pounds of gold in my backyard, that will make the economy adjust one way, compared to the scenario in which a guy in France finds it.