Cantillion effect, Joseph Schumpeter's theory of economic development and the impact of innovation on welfare

Abstract

Irish economist Richard Cantillon, regarded as the founder of modern economic theory, highlights the critical role of entrepreneurs as the driving force behind market processes. Cantillon argues that an increase in the money supply does not necessarily result in a general rise in the price level; instead, it can gradually harm the real economy by distorting the relative prices established in the market. This effect is known as the Cantillon effect. New money generated by the increase in money supply primarily benefits high-income groups, while lower-income groups receive it much later. This structure of money distribution suggests a violation of the neutrality of money. The excess money in this context manifests as new money, which primarily enriches one group before inflation sets in. Consequently, this can result in what is viewed as unjust enrichment for that group. In contrast, those who receive new money later do so after inflation has occurred, which diminishes their purchasing power (Alpağut, 2024: 658).