The Gold Goes To Those Closest To The King
On Chamath Palihapitiya, Matt Stoller and The Cantillon Effect
Chamath Palihapitya and the Cantillon Effect (via Matt Stoller of “Big”)
Palihapitya in an interview stated simply that the U.S. shouldn’t bail out hedge funds and billionaires during the midst of this crisis. While the interviewer framed this as not bailing out the rank and file, Palihapitya disagreed and observed that the equity holders of many investments were in fact wealthy and institutional in nature. Joe Main Street wasn’t getting the help it needed but “Wall Street” was.
Let’s tie Chamath’s argument with the Cantillon Effect.
Matt Stoller’s “Big” publication focused on this in his piece, “The Cantillon Effect: Why Wall Street Gets a Bailout and You Don't”.
Stoller asked question that Chamath was answering: “If there’s money for the entire economy, why is that normal people and small businesses can’t access unemployment insurance and lending programs? To put it another way, why is the money meant for everyone only showing up in the stock market?”
The answer is based on how in the real world that wealth and money is uneven in its spreading during a flood of new money and financial aid. Most of the expected trickling of wealth to the broader population is slow, with most of it captured.
Stoller observed that this is not the first time this has happened:
An 18th century French banker and philosopher named Richard Cantillon noticed an early version of this phenomenon in a book he wrote called ‘An Essay on Economic Theory.’
His basic theory was that who benefits when the state prints a bunch of money is based on the institutional setup of that state.
In the 18th century, this meant that the closer you were to the king and the wealthy, the more you benefited, and the further away you were, the more you were harmed.
Money, in other words, is not neutral.
This general observation, that money printing has distributional consequences that operate through the price system, is known as the “Cantillon Effect.”
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This theory doesn’t imply that money creation is always biased towards the powerful, only that how money travels matter.
There is no inherent money neutrality, such neutrality must be constructed by institutional arrangements.
Richard Cantillon was an Irish-Frenchman who made a fortune from the infamous Missippi Company but who was best known for what the first complete essay on economics. It was published in 1755 almost 20 years after his death.
Stoller recalled there was a time that economic policies and institutions were designed to help small business but that shifted in the early 1980s and these structures were “hollowed out”. There are no mechanisms designed for direct help for “Main Street”. Both Stoller and Palihapitya in interviews stressed the need to address this.
“the basic outline of the Cantillon Effect, that some people have more purchasing power and others have less in the same economy, if the channels of money creation make it so, is still operative.”
Stoller said with respect to real help for “Main Street” the same as Palihapitiya:
If we want to be able to expand and reduce the money supply in a way that doesn’t benefit the already powerful and hurt everyone else, we have to have institutions to do so.
“Pomp’s” interview of Palihapitya included his concern that any truly helpful bailout should include a focus on local municipal governments and communities. Right now most are aware that the institutions we have are not yet equipped for this challenge.