The Cantillon Effect was introduced in the 18th-century by economist Richard Cantillon. Cantillon observed how changes in the money supply could create economic distortions, where those who first receive newly created money benefit the most, while others experience the negative effects of inflation later on, leading to income inequality and imbalances in the economy.
During the COVID-19 pandemic, governments and central banks pumped more money into the economy to fight the downturn. Although this was meant to boost economic activity, it also caused inflation and widened income inequality. Those who got the new money first, like asset holders, benefited greatly, while wage earners and small businesses, who received help later, faced higher costs. This uneven impact is a clear example of the Cantillon Effect.
true Economic Growth Through Cost Reduction
The Cantillon Effect shows how new money entering the economy benefits some groups more than others, leading to inflation and greater inequality. Those who get the money first, like big companies and financial institutions, can invest and profit before prices go up, while others face higher costs without the same advantage. Real economic growth, on the other hand, comes from entrepreneurs who lower production costs, driving innovation and efficiency.
For example, a tech startup might spend $50,000 a month to produce 10,000 units of software. If they manage to cut costs to $40,000—through automation, outsourcing, or better supplier deals—the cost per unit drops from $5 to $4. This gives the entrepreneur a choice: keep the price at $10 to increase profits, or lower it to $8 to attract more customers. By reducing the price, they could boost sales, gain market share, and grow revenue.
But during the COVID-19 pandemic, instead of fostering this kind of true economic growth, governments around the world often shut down small businesses with restrictive policies. These lockdowns hit small enterprises hardest, limiting their ability to innovate and succeed, while big companies—who got financial help first—thrived. This worsened the Cantillon Effect, where those already in strong positions gained more, while small businesses, which usually drive economic growth, were held back. Instead of encouraging broad-based prosperity through entrepreneurship, these policies deepened inequality and slowed real economic recovery.
a return to the gold standard, please!
The problems caused by inflation and uneven money distribution show why going back to the gold standard makes sense. With a gold standard, the money supply is tied to a fixed amount of gold, limiting how much money central banks can print. This helps prevent inflation and the economic distortions seen with the Cantillon Effect.
A gold standard would ensure money keeps its value over time, reducing the chances of major inflation and creating a more stable economy. This stability would benefit both businesses and consumers, promoting real economic growth based on innovation, not just on the uneven spread of new money.
In short, returning to the gold standard could help resolve the economic imbalances made worse during the COVID-19 pandemic by controlling inflation and creating a fairer economy.
Want to learn more about the Cantillon Effect? Click here for a wonderful white paper written by The Quarterly Journal of Austrian Economics.