Golden Meteors and Cantillon Effects
Let us imagine a world economy entirely on the gold standard. In our imaginary world, gold is scarce, but with a difference: every once in a while, a meteor of pure gold hits the Earth -- and, we might even imagine that these meteors are sometimes of a great enough size that they represent a significant change in the world's gold supply, say, several percent. Furthermore, this is a "finders keepers" world, so whoever happens to discover this lump of gold first owns it.
It is clearly true that these random events will effect relative prices. If Farmer Joe who finds one of these meteorites in his wheat field simply loves Picassos, his find might have a large impact on the price of Picasso's paintings. But would any economist who touts the efficacy of markets and market prices see any terrible difficulty hindering the working of the market process in these events? Isn't it simply the case that there has been a change in effective demand, and market prices will change to reflect that change? And although my example doesn't happen in our world, analogous cases do: "And then one day Jed was shooting at some food / And up from the ground came a bubbling crude / Oil, that is." It is quite possible that a dirt farmer may accidentally discover an oil field on his and, and suddenly be able to effectively demand much more than he formerly could: Market actors, per standard theory, will shift their output to reflect this fact.
The above scenario came to me as I have been contemplating Steve Horwitz's analysis of the impact of Cantillon Effects on the economy. Steve contends:
I can conceive of one line of response to the above considerations that those who worry about Cantillon Effects might offer: "True, those gold meteors would increase the epistemic burden on market actors, and would lead to more wrong guesses about what a price movement means, but they are outside our control. On the other hand, these injections of money by the central bank are within human control, and so are unnecessary increases on the epistemic burden on market actors."
Is this the correct way of understanding this argument? Steve? Bob?
It is clearly true that these random events will effect relative prices. If Farmer Joe who finds one of these meteorites in his wheat field simply loves Picassos, his find might have a large impact on the price of Picasso's paintings. But would any economist who touts the efficacy of markets and market prices see any terrible difficulty hindering the working of the market process in these events? Isn't it simply the case that there has been a change in effective demand, and market prices will change to reflect that change? And although my example doesn't happen in our world, analogous cases do: "And then one day Jed was shooting at some food / And up from the ground came a bubbling crude / Oil, that is." It is quite possible that a dirt farmer may accidentally discover an oil field on his and, and suddenly be able to effectively demand much more than he formerly could: Market actors, per standard theory, will shift their output to reflect this fact.
The above scenario came to me as I have been contemplating Steve Horwitz's analysis of the impact of Cantillon Effects on the economy. Steve contends:
More systemically, these relative price effects increase the epistemic burden on market actors as prices become less reliable signals of underlying consumer preferences and opportunity costs, thanks to the temporary pushes and pulls from the injection of excess supplies of money. People are simply more likely to guess wrong about what a price movement means, and are thereby more likely to make irreversible (at least to some degree) decisions with respect to investments in human and physical capital.Aren't injections of money into the economy by the central bank much like the landing of our gold meteors? Now, I am very sympathetic to the argument that there is an issue of equity here: the meteors' landing spots are outside of human control, but the central bank deliberately places these golden meteors, say, in the vaults of the big investment banks, and that is unjust. But, given that it has done so, why doesn't the market simply adjust to such real changes in effective demand just as it would to the discovery of our gold meteors? Given that certain consumers really are wealthier after the injections, and opportunity costs really have changed, doesn't the new constellation of prices simply reflect this new reality in the same way it would after Farmer Joe discovered his gold meteorite?
I can conceive of one line of response to the above considerations that those who worry about Cantillon Effects might offer: "True, those gold meteors would increase the epistemic burden on market actors, and would lead to more wrong guesses about what a price movement means, but they are outside our control. On the other hand, these injections of money by the central bank are within human control, and so are unnecessary increases on the epistemic burden on market actors."
Is this the correct way of understanding this argument? Steve? Bob?
You have left out two salient factors which underlie the difference between govt inflated fiat currency and changes in the supply of a commodity.
ReplyDelete1) The moral hazard inherent in ownership of the money printing press does not exist.
2) No Legal Tender Laws. If the scarcity of gold were to decrease to the point where it was not useful as a money, or the instability was less than desirable, anyone could base their accounts in something more stable, such as platinum, silver, shares of Microsoft, etc.
Having more of something that is worth less is not an increase in wealth. That's Keynes' greatest lie.
A Picasso is a little tricky. Each one is essentially unique so the marginal cost of production is undefined.(or infinite) Since there are no producers of Picassos, there really isn't much room for Picasso purchasing to distort investment.
ReplyDeleteReally, the best model for Picassos is a sort of currency with very limited supply.(and thus our farmer is just exchanging one form of money with another) If he then holds onto his Picassos(instead of exchanging them for other goods and services), I can't see the result being much different than if he had hidden the meteor instead of spending it.(or if the meteor had never landed)
If, on the other hand, our dirt farmer invests his resources, turning his new wealth into permanent income for consumption, then the changes in demand are essentially permanent as well.
Gold meteors add real wealth to the economy rather than simply re-arrange it (as you note) in favor of we the well-connected. Yes, it's disruptive, in the sense that "creative destruction is" -- the destruction is the result of adaptation to new wealth.
ReplyDeleteUm, Silas, this post is about Cantillon effects?
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