ZH recently laid out a multi-faceted case detailing how inequality is caused by government intervention. I believe the case is pretty strong there (much stronger than the bare assertion that the “free market – WHERE?! – is doing this), but it misses one of the basic principles of inequality that most people do know about or understand.
Next time you run into someone intent on telling you that the free market is the cause of inequality, ask them who Richard Cantillion is. The Cantillion Effect is probably the greatest cause of inequality in operation today, and it is a circumstance in which the creation of new money enters the economy at distinct points, enabling those who first see new money to benefit from the money before inflation has occurred throughout the economy. More technically, to wit:
Cantillon effects are the real fundamental changes in resource allocation that result from changing relative prices between the time of the creation of new money and the full adjustment to the increase in supply. For Cantillon, an increase in commodity money, such as silver, would increase employment and prices. It would impose “forced savings” and lower real incomes on those whose income was not changed due to monetary inflation, possibly leading to unemployment or emigration. If the money supply increased due to a balance-of-payments surplus, then the additional money could cause an increase in manufacturing or expansion in whatever the new money holders chose to spend their money on.
In response to the change in relative prices, more resources are allocated to long-term capital goods. Unlike other aspects of the self-adjusting market process, such as money, land, labor, and short-term or intermediate capital goods, these resources become suspended or fixed in long-term fixed capital goods. These resources become formulated in a highly specific capital good that may not be well suited to the alternative production processes of the postadjustment economy. As a result, all of the adjustment in these long-term fixed capital goods must come from a change in price and this will entail large losses and possible bankruptcies by the owners of these capital goods. To the extent that these types of adjustments are widespread, they pose a threat to capital markets and the banking system.
In other words, if you do not understand why the guys in finance and banking are so much better off than you (and always will be), you probably shouldn’t be talking about inequality and the causes of it. Where money is involved in every transaction, you can be sure that if some people have money that is worth more than everyone else’s, the gap between the rich and poor will widen immensely. Interestingly enough, a government is not even necessary to have the Cantillion Effect. They happen in a free market (though are gentle enough to produce inequality is not wrenching), and just as violently in a fractional reserve banking society without capital constraints…
Of course, searching ZH, they have done a post on it before. Beat me to it.