Question for the Economics Gurus

August 2022 Forums General discussion Question for the Economics Gurus

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  • #230549
    ALB
    Keymaster

    I don’t know who it is from but it wasn’t Marx. It has also been expressed as MV = PT, as by Irving Fisher in the 1930s.

    In Marx’s day the Quantity Theory of Money, as expounded by David Hume and David Ricardo, was not just an equation that was true by definition, but a theory that the level of prices was determined by the amount of money in circulation, so that if this was increased the result would be a rise in prices.

    Marx and others rejected this theory, arguing that, on the contrary, it was PT that determined how much money was required. At the time gold was the main currency for international trade and paper money was convertible into it. If an attempt was made to put more gold in circulation this would fail as it would become more profitable to hold gold as billion than gold coins and so to convert them into it.

    For Marx the Quantity Theory was valid only where there was an inconvertible paper currency (as today). In that case if the amount of money was increased the result would indeed be a rise in the general price level.

    #230550
    Bijou Drains
    Participant

    “For Marx the Quantity Theory was valid only where there was an inconvertible paper currency (as today). In that case if the amount of money was increased the result would indeed be a rise in the general price level.”

    But surely that was I was saying (and if I am right that Hardy was saying). i.e. If I keep the Kilgallon billions tucked away under the bed, it isn’t circulating.

    In the same way a large amount of cash is resting in the form of money held as effectively cash in hand by the general population. As we move to more cashless societies millions of people hav stopped hanging on larger amounts of cash in hand dues to the fact that you don’t need to have as much. I personally carry far less cash than I used to, I’m sure commercial organisations work in the same way. for example, thinking about pubs, the amount of physical cash stored before banking must have fallen substantially as well as the amount held back in the form of a float. Or am I missing something?

    #230551
    ALB
    Keymaster

    I think it is simpler to say that the move towards a cashless society means that less money (notes and coins) is required. It would be stretching things a bit to say that it represents an increase in the velocity of circulation of existing money, even though this too would mean that less money was needed.

    As an example of how the equation is used today here’s an extract from the FT in 2009 (even if the author got in wrong about QE and tumbling prices, that’ll be the day):

    MV=PT is true, but how to use it?

    The equation at the heart of quantitative easing and crude monetarism is known as the “quantity theory of money” where MV = PT. M is the quantity of money, V is the speed money flows round the economy, P is the level of prices and T is the number of transactions. By definition, the equation is true, but controversy has raged over the use of this formula. If you believe V and T are stable, then control of the money supply guarantees control of inflation. Quantitative easing raises M, so if V is fixed, it will push up P or T or both.
    In today’s recessionary and deflationary world, that would be a welcome result. But if banks, companies or households sit on the extra cash sending V plummeting, M may go up while P and T still tumble. History tells us V has never been sufficiently predictable to be reliable for use in policy.”

    #230552
    Bijou Drains
    Participant

    I found the quote from Hardy, it was from Some Aspects of Marxian Economics pg 34

    “In Britain the amount of notes in circulation in 1938 was £554 millions. It is now about £5,330 millions. Since 1938 the needed amount has been affected by certain changes, including greater total production (now more than double the 1938 level),
    and increased population, which would operate to raise the needed amount of currency. Working in the opposite direction has been the wider use of cheques, etc. and corresponding reduced need for notes and coin”

    Obviously I was using the same argument about cashless payments that Hardy was with regards to cheques

    #230553
    ALB
    Keymaster
    #230555
    james19
    Participant

    I posted this on RMT Twitter account page…and The Times*

    When there was no such thing as inflation, at the turn of the 20th Century. Wages were a pittance, children, forced into indentures worked a 16 hour day, 6 day week. Sundays were for God. You preyed for a better life after death!
    The Tories, its then predecessor, were not the Party of the workers!

    * A good response this being 1…

    Well yes! People seem to forget this nugget of information because most people never pick up a history book!

    • This reply was modified 1 month, 3 weeks ago by james19.
    #230595
    ALB
    Keymaster

    I think you must have meant at the turn of the 19th century. Bad as conditions were in 1900 they weren’t that bad! Mind you, the Whigs, the predecessors of today’s Liberal and Labour parties, weren’t much better than the Tories from a working-class point of view. In fact in some ways were worse as the Liberals were the party of the factory owners.

    It’s true that capitalism without rising prices is no utopia. From 1815 to the end of the century the price level was relatively stable. And, after a period of inflation following the end of WW1, prices were often falling in the 1920s and 30s. In fact the second Labour Government collapsed in 1931 over whether or not to reduce benefits and civil servants pay in line with falling prices.

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