Quantity theory

The quantity theory of money , often just quantity theory for short , is an economic theory which, under certain conditions, assumes a causal dependence of the price level on the money supply .

Derivation

The starting point for the representation can be a traffic or quantity equation , which ultimately states that the amount of money converted in a certain period is equal to the monetary valued trade in goods of an economy:

${\ displaystyle M \ cdot V = P \ cdot Y}$

M stands for the amount of money, V for the speed of money circulation , P for the price level and Y for the trade volume (of real goods), which is strongly correlated with GDP ( gross domestic product ). For this reason, GDP is also equated with Y in many representations of the quantity equation. Strictly speaking, however, this representation is incorrect because the trade volume deviates from GDP due to changes in inventory levels, among other things.

The following applies to price level P:

${\ displaystyle P = {\ frac {M \ cdot V} {Y}}}$

From this equation, a version of quantity theory can be derived, according to which the price level is only explained as being dependent on the amount of money. The prerequisite is:

- constant speed of rotation

- constant trading volume.

${\ displaystyle P = f (M) = c \ cdot M}$

Here is constant, P is proportional to M. ${\ displaystyle c = {\ frac {V} {Y}}}$

The basis of “modern” monetarism is a newer form of quantity theory, in which it is only assumed that the velocity of circulation and at least in the longer term the real trade volume (and thus also real production) are determined essentially independently of the money supply. In any case, changes in the money supply mainly affect the price level in the longer term. In particular, according to this theory, too rapid an expansion of the money supply is to be regarded as the main cause of inflation .

The effects of monetary policy on the price level and on macroeconomic processes are discussed under the concept of the neutrality of money , whereby widely differing views coexist.

history

Already Nicolaus Copernicus and Jean Bodin developed the basic ideas of the later quantity theory. The first complete formulation of the essential elements of quantity theory comes from the English philosopher John Locke , who, building on Bodin, introduced the concept of the velocity of circulation and emphasized the nature of money as a medium of exchange through convention (according to Aristotle ). Later the concept was simplified by David Hume . The economist Irving Fisher later took up the concept and improved it ("The Purchasing Power of Money"; 1911). The most important proponent of the neo-quantity theory of money was the American Milton Friedman .

Recognition and rejection by various economics schools

The various schools of thought in economics assess quantity theory differently and, if it is approved, also draw different conclusions. John Maynard Keynes rejected the claim, linked to quantity theory, that the central bank could influence prices by controlling the money supply without affecting the real economy. A policy of deflation , as envisaged when England returned to the gold standard in 1925, would not automatically lower prices, but only through unemployment deliberately induced by monetary policy .

Representatives of Keynesianism see a connection between monetary policy and economic and demand that the nation states should be in a recession by additional spending economic incentives that an inflation risk should be financed by increasing the money supply by credit creation, the acceptance.

Keynes affiliate Joan Robinson suggests that the quantity equation can be read in two directions. Reading from left to right, a higher supply of money appears to result in higher prices. From right to left, higher prices seem to result in greater circulation of money. The quantity theory does not follow from the quantity equation itself.

Representatives of monetarism contrast, consider the theory as valid and advocate a constant money supply growth as well as a waiver of discretionary monetary policy. Representatives of the Austrian School also see a fixed connection between the amount of money and the value of money . They see inflation as a direct result of the expansion of the money supply.

Representatives of libertarian currents , especially popular in the USA, reject both fiat money and any state influence on money in general, such as controlling the amount of money supply. Instead, some advocate the reintroduction of the gold standard in order to avoid high inflation rates. Others call for free competition of money, since there nobody can influence the money supply for his benefit.

literature

Moritz Julius Bonn Spain's decline during the price revolution of the 16th century. An inductive experiment on the history of quantity theory (= Munich economic studies. 12). Cotta, Stuttgart 1896, ( digitized version ).

Web links

An interactive application (Adobe Flash) - the user can use sliders to change the variables M, V and Y and try out the effect on the price level. Using the second tab in the Flash animation, quantity theory 2.0 is also identified and animated there.

Individual evidence

^ John Maynard Keynes: The Economic Consequences of Mr. Churchill. In: John Maynard Keynes: Essays in Persuasion. WW Norton & Company, New York NY 1991, ISBN 0-393-00190-3 , p. 259.

↑ Joan Robinson: Economic Theory as Ideology. About some old-fashioned questions in economic theory. European Publishing House , Frankfurt am Main 1980, ISBN 3-434-25113-8 , p. 83.

[1] John Maynard Keynes: The Economic Consequences of Mr. Churchill. In: John Maynard Keynes: Essays in Persuasion. WW Norton & Company, New York NY 1991, ISBN 0-393-00190-3 , p. 259.