Quarterly Journal of Austrian Economics

Money, Inflation, and Business Cycles: The Cantillon Effect and the Economy


[Money, Inflation, and Business Cycles: The Cantillon Effect and the Economy, by Arkadiusz Sieroń. Abingdon: Routledge, 2019. x + 162 pp.]

Abstract: Austrian economists hold that money matters a great deal in concrete terms in the immediate short run and has permanent long-run effects. Sieroń’s book investigates the Cantillon effect, which indicates that money is not neutral because inevitably it is injected unevenly, creating economic distortions. These distortions are important to the long run and the Austrian theory of the business cycle.

Economists agree that money matters, but that agreement stops when it comes to how money matters. For example, some say it only matters in the short run while others believe that it matters in the short and long run. Austrian economists hold that money matters a great deal in concrete terms in the immediate short run and has permanent long-run effects.

Given that the world economy has experienced more than a decade of radical and unproven monetary policy by central banks and half a century of fiat currencies, the effects of money are more important than ever. Professor Sieroń has produced a comprehensive review of this question and has extended the analysis of this key question in many different directions.

The central topic of the book is the Cantillon effect, which appears in the titles of all but one chapter. This effect was named after Richard Cantillon, the first economic theorist. He wrote, circa 1730, that the effect of new money depended on where it was injected into the economy.

Chapter one deals with the neutrality of money, where money has no effect on the economy. Five types of money neutrality are described and examined. The assumptions made for each are explained, and in particular, all the conditions that must exist for “dynamic neutrality” are explained. The reader will no doubt come the conclusion that money is never neutral and that it could be dangerous to make such an assumption as part of one’s economic analysis.

In chapter two, the theory of the Cantillon effect is explained. It begins with an increase in the money supply and who first receives the money. That means the increase of money changes income distribution in favor of who first receives the new money. Then, depending on the preferences of those who first receive the money, some goods will experience an increase in demand, while other goods will experience a relative decrease. This in turn changes outputs of various goods and ultimately investments. Cantillon famously noted that if the new money comes into the hands of savers, that the interest rate would decrease, but if it comes into the hands of consumers, the interest rate would increase, as entrepreneurs would need to borrow more to meet the increased demand for goods.

Chapter three recaps the Cantillon effect in the history of economic thought. Beginning with Cantillon himself, the views of David Hume, John Cairnes, and other classical economists are examined. Then Irving Fisher, John Maynard Keynes, New Keynesians, Post Keynesians, and other modern schools of macroeconomics are considered, including the Austrian school, along with a special emphasis on Milton Friedman’s approach. In general, non-Austrians tend to think that Cantillon effects exist only in the short run and the effects can be generally assumed away, whereas the Austrian economists incorporate them as central to their analysis and show that the effects are important even in the very long run.

Chapter four provides a complete classification of the various types of Cantillon effects. Cantillon’s own analysis is presented and then extended to the modern context. Chapter five examines the Cantillon effect in the modern context of credit expansion. In chapter six, the various types of credit expansion are examined to explain the secondary characteristics of a business cycle. So, for example, if the expansion is mainly in the area of home mortgage credit, then a housing bubble results. In the next chapter, price bubbles in certain asset prices are shown to be proof par excellence of the Cantillon effect to which Austrian economists are alert, but which mainstream economists ignore, except perhaps in the positive light of the so-called wealth effect.

The next two chapters explore two of the more controversial topics, from the mainstream perspective. The first, chapter eight, analyzes the impact of new money on income and wealth. It is shown here that there are winners and losers from new money. For example, the Fed’s monetary expansions tend to help the wealthy, banks, big corporations, and the financial industry more generally. Subsequently, as prices rise, the Fed’s policy hurts retirees, those on fixed incomes, and wage earners who receive the new money last, if at all. This is one reason why the Fed and most mainstream macroeconomists vigorously deny the existence and importance of Cantillon effects and adopt the assumption of neutral money. Tragically, they often get away with this ruse because the theft cannot be directly seen, except in the final result.

The last substantive chapter, chapter nine, explores the Cantillon effect in the international context. Given globalization, the structure of production is now more integrated than ever, and that is a good thing. However, as a result, new money creation by central bank will have negative international consequences. Under certain circumstances the channels of new money flow can dampen the business cycle and price inflation, but the primary impact is for major central banks, in particular the Fed, to export business cycles, economic crises, and price inflation. Obviously, the Fed would vigorously deny that it is the source of global economic instability, but others have found that this is empirically the case. The book is concisely written and is “insight dense,” and is a much-needed contribution to the literature.


Thornton, Mark. “Review of Money, Inflation, and Business Cycles: The Cantillon Effect and the Economy.” Quarterly Journal of Austrian Economics 22, no. 3 (Fall 2019): 503–05.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
What is the Mises Institute?

The Mises Institute is a non-profit organization that exists to promote teaching and research in the Austrian School of economics, individual freedom, honest history, and international peace, in the tradition of Ludwig von Mises and Murray N. Rothbard. 

Non-political, non-partisan, and non-PC, we advocate a radical shift in the intellectual climate, away from statism and toward a private property order. We believe that our foundational ideas are of permanent value, and oppose all efforts at compromise, sellout, and amalgamation of these ideas with fashionable political, cultural, and social doctrines inimical to their spirit.

Become a Member
Mises Institute