Why Cantillon effects do not exist

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Basic thesis:

If Cantillon effects (CEs) exist, the price theory based on the subjective theory of value (STV) is not generally valid. The general application of the Law of Diminishing Marginal Utility (LDMU) would also be problematic. CEs are no natural market economic effects.

What are CEs:

CEs cause relative changes in the prices of goods as new monetary units enter into the circulation. It is argued that each newly added monetary unit causes an unnatural relative change in the price level, and this effect does not spread evenly.

Explanation of invalidity of CEs:

§1 If this is a general rule, we should be able to apply CEs to other goods not only to money and as well as outside the monetary economy. If we apply CEs to goods other than money and outside the monetary economy, we must claim that adding or withdrawing any unit of good to / from circulation changes the relative prices of that goods to other goods and changes are uneven.

§2 However, this would mean that price theory based on the STV is not valid. The STV argues that prices are derived from the attribution of the value to goods which we exchange. The value is attributed to a good on the basis of how that good meets the needs of man and how the need is urgently perceived. According to the urgency of the need in question and the discovery of the causal relationship of its satisfaction with some good, we demand some good more and some less. The prices are then derived as the exchange rate of the more preferred goods that one wants to acquire in order to satisfy needs, to the less preferred goods that one discards and vice versa from the other’s point of view.

§3 If the §2 is correct, the addition or withdrawal of a unit of a good to / from circulation is not a necessary condition for relative price changes. It is only a sufficient condition. Price changes depend on the evaluation of people, not on changes in the number of goods in the economic community. This means that adding / removing goods to / from circulation may or may not change the relative prices of the goods to other goods. Relative prices are necessarily dependent on the valuation of people, not necessarily on the addition / withdrawal of goods to / from circulation. This implies that CEs are not valid in general.

§4 Nor do CEs exist in terms of unnatural changes in the price level that the interpretation of the CEs for other goods should also imply. Voluntary withdrawal / addition of the unit of the requested good by the owner of the good cannot be evaluated in any way. If we apply the judgment in terms of the negative impact of the effect, as something that should not have happened, we carry out a value judgment on the decision of the owner of the stock of good.

Potential defense of the existence of CEs: “CEs are valid only for money”

Defense thesis:

CEs are only applicable to money. Not to other goods. This is because the valuation of other goods changes over time due to the change of the economic context. This indicates that the CEs cannot be applied to other goods, where relative price changes in the context of the effects express a unique economic value context over time. This does not apply to money. Money is valued as time invariant good, respectively, on the contrary, it is CEs, i.e. a description of the addition / withdrawal of a monetary unit to / from circulation, which describes changes in the value perception of money.

Problems raised by the defense thesis:

§5 The argument implies an exception from the STV. Indeed, in the context of the STV, prices of all (other) goods are derived from the evaluation of individuals and the subsequent exchange of less preferred goods for more preferred goods. In the case of money evaluation, however, it should be the price of money, i.e. the purchasing power, which determines and influences the evaluation of money. If the purchasing power changes, i.e. the number of units of money in circulation, thus it changes the approach to evaluating a monetary unit in question. In other words, the attribution of value to money depends on what we can buy for money. However, what we can buy for money is actually their price. However, according to the STV, this is to be the result of attribution of value and the resulting exchange of money for another good (price), not an assumption. It would therefore be an exception to the STV.

§6 If we accept the special status of money within the STV, which allows the application of CEs, it must also be implied that the LDMU cannot be directly applied to money (Mises 1953, pp. 108-109 is also aware of the problem). The reason is that with money, as a special good, we do not satisfy (allegedly) any need. This is because we assign value to money based on what we later buy for the money. And this is problematic in terms of the application of the LDMU. As we have seen in §2, the price (in the case of money the purchasing power) should be derived from the STV and the application of the LDMU, which implies the demand and supply of the good. The LDMU is the law of action, i.e. it is the inherent feature of action when preferring more to less urgent needs satisfied by goods. The LDMU is in other words derived from the fact that one wants to satisfy various perceived and at the same time scaled needs by some goods. However, the special position of money in the case of the attribution of value to money (on the basis of its purchasing power) means that, in this case, the LDMU would be applied on the basis of the characteristics of the money, meaning what we can buy for money later and not from the person’s preference to satisfy his needs, which is prior. The LDMU would therefore not be a generally applicable law of action due to the fact that when we use money we definitely act. Applying the LDMU to the money per se is not even very logical. The additional monetary unit added into circulation is assessed as less valued in terms of its purchasing power, but this is due to a dilution of the purchasing power of the money supply which would otherwise remain identical. This implies that we would attribute to monetary units in circulation a change in purchasing power on the basis of CEs and not on the basis of the LDMU from which prices of other goods are derived. This is because the newly-added unit in the hands of those who have it first would be considered first in the same way, i.e. as part of the monetary units of a pre-existing money supply before the change of purchasing power. This is precisely what CEs and their alleged negative impact are, i.e. that the first person to get to the new monetary unit is in advantage. It could only be an advantage because everyone else perceives the money value the same way it was before adding that extra unit of money. Only then would the attributed purchasing power fall as users of money realize different number of monetary units in circulation.

CEs deny the logic of price theory based on the STV and deny the logic of the LDMU, on the basis of which the pricing can be explained. CEs would describe the changes of purchasing power of money only if we presuppose the existence of an objective price of money, i. purchasing power, respectively. what Mises (1953) calls an objective exchange value of money, meaning that it would be therefore an objectified objective exchange value of money.


Either CEs are valid or the STV and the LDMU are not or CEs are not valid. The arguments of those concepts are mutually contradicted. CEs can only be applied to political, forced, interventions in the economic community (for more details see Pošvanc 2018a). At that time, we can imply the existence of negative price changes and an equally asymmetric spread of politically motivated interventions in people’s decisions. However, only in relative way.

This is because we are able only relatively determine unambiguously the degree of non-voluntary political intervention. On the one hand, an interference with the individual’s personal property, which determines the limit of a person’s personal freedom, is a clear criterion. On the other hand, the clarity of this criterion is relativized by the problem of determining the level of voluntary adaptation of an individual into some form of group of individuals as well as the empirical problems related to the application of the concept of property rights (for the concept of property rights and its empirical context, see Pošvanc 2009)..

An explanation of the acquisition of the purchasing power of money in terms of the logic of the STV and the LDMU and the correction of erroneous statements about money can be found in my article “Evolutionary possibilities of the emergence of economic calculation and money. The problem of the impossibility of socialism.”


Methodological appendix

§7 The discussion of the CEs also enables the identification of the currently inaccurate interpretation of the LDMU. If it is correct (and it is) that in time a particular value to the good is necessarily attributed within the different value context, then the LDMU cannot be valid in reality, respectively it should be just a model law in the sense of the ceteris paribus rule. Indeed, the LDMU is necessarily applied over time when needs are necessarily met in time. This means that every additional unit of the good satisfies the needs less and later in time. If, at the same time, each homogeneous and relevant unit of good X has a different value context over time, then we must imply that the LDMU is not valid at all. Later in time, a less demanded unit of good that is less valued on the basis of the LDMU could not be less valued because there is no lower valuation. There would be only a different, within the time discontinuous, assessment of the good in question with respect to a different economic context. On the basis of a discontinuous assessment, although new prices would be generated, however they would be incomparable with past prices. Equally problematic would be the related problem of time preferences, where it would not be possible over time to prefer to satisfy a need with some goods sooner rather than to satisfy them later in the future, given the different value context of the comparison in time and necessarily another economic context attributed to the valuation (the problem of this interpretation of time preferences is pointed out e.g. by Murphy 2003 or Potužák 2016 who solve this problem in different manner).

The LDMU certainly applies in reality and definitively it is the law of action. However, to show its validity it is necessary to modify its interpretation so that it is applicable over time. For a potential solution on how to apply a comparable evaluation concept over time, see e.g. in Pošvanc (2018b), the presented concept makes possible to interpret the LDMU over time as well as to apply the concept to the problem of time preferences.

Matúš Pošvanc, Oct 29, 2019


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Murphy, Robert P. 2003. Unanticipated Intertemporal Change in Theories of Interest. Ph.D. Dissertation, New York WWW DOCUMENT <University.http://consultingbyrpm.com/uploads/Dissertation.pdf>

Pošvanc, M. 2018 a. Cantillon effects. WWW DOCUMENT < https://medium.com/@matus.posvanc/cantillon-effects-bcb4b91e3eb2>

Pošvanc, M. 2018 b. The Theory of Interest. Revision of the Austrian Approach. Annex 1: Remarks, Relations and Arguing over the Work of Pavel Potužák. WWW DOCUMENT < https://medium.com/@matus.posvanc/the-theory-of-interest-977e2d3c3452>

Pošvanc, M. 2009. Vlastníctvo ako inherentná súčasť spoločenských vzťahov. (Ownership as inherent part of social relationships of men) WWW DOCUMENT <https://e-logos.vse.cz/index.php?article=272> Only in Slovak language.

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