To better understand this phenomenon, the income earned by 1,000 Americans over 32 years is equivalent to the income of these billionaires in just one day.
Inflation is one factor influencing this phenomenon. Over the past five years, the Consumer Price Index has risen by 24.3%, while the real average hourly wage in the U.S. has decreased by 0.1%, indicating that wages have not kept pace with inflation.
There are many reasons for the widening wealth gap, but one major factor was proposed over three hundred years ago, long before the establishment of the U.S. Federal Reserve System.
This theory is known as the Cantillon Effect, introduced by the Irish-French economist Richard Cantillon.
So, how does the Cantillon Effect work?
The core of the Cantillon Effect is that the distribution of wealth primarily benefits those who receive funds first, as they can consume before prices rise due to inflation. By the time these funds reach others, many of the advantages enjoyed by early consumers have already dissipated.
Cantillon once wrote, “Rivers meander in their beds; when the volume of water doubles, it does not flow at double the speed.”
Wealth initially concentrates in the hands of miners and their workers, benefiting miners, smelters, and refiners. Their families increase consumption of meat, wine, or beer, wear better clothing, live in more splendid houses, and enjoy quality goods at normal market prices.
This “gold mine wealth” then flows to artisans, chefs, and tailors who provide services for these high-end products, causing their prices to rise due to increased demand.
Next, downstream economies such as those providing livestock for farmers or silk producers are affected, until the impact reaches the most marginalized groups in the economy, such as maids or stable hands.
It is important to note that people at all levels experience a period of rising prices before wages increase. Those farthest from the gold mine (in this example, the initial source of new funds) will feel the effects of inflation for the longest time until their wages catch up.
This effect is even more significant in modern society. Today, gold mines are no longer the source of new funds; rather, it is the digital currency printing press of the Federal Reserve.
The Cantillon Effect in Modern Economy
Maintaining normal economic operations is quite challenging. Central banks occasionally print money by increasing liquidity, influencing interest rates, and supporting financial stability during crises.
How new funds enter the system is crucial. When the government decides that more funds need to be injected,
