Understanding the Quantity Theory of Money
At its core, the most commonly acknowledged - often termed as the ’neo-quantity theory’ or the Fisherian model - specifies a direct and fixed proportionality between money supply changes and overall price levels. This approach, though critiqued, leverages an equation established by American economist Irving Fisher:
M \time V = P \times T
where:
M = money supply
V = velocity of money
P = average price level
T = volume of transactions in the economy.
Generally expressed, this model explicates how fluctuations in the quantity of money create proportional changes in inflation levels. Insights indicate that if authoritative bodies like the Federal Reserve or European Central Bank were to double the money supply, then in the long-run, the overall price metrics within the economy would incline upwards intensively, given that increased money in circulation drives consumer demand and boosts spending, incrementally raising price indices.
Critiquing Fisher’s Quantity Theory of Money
Economists often dispute the rapidity and proportionality with which prices adapt following changes in the money supply, alongside varying stabilities of money velocity (V) and transactions (T). While the Fisher model is foundational, alternative interpretative frameworks contest several core assumptions utilized for its simplification, like the neutrality and autonomy of monetary supply variables and their comprehensive representational usage.
Exploring Competing Quantity Theories
Monetarists
Proponents of monetarism such as Milton Friedman from the Chicago school endorse Fisher’s model albeit with nuanced adjustments. This perspective acknowledges the non-constant or stable nature of velocity, which may unpredictably align with business cycle fluctuations, suggest adjustments might be considered for policy implementations. Monetarists advocate for a consistent, stable increase in the money supply, promoting the view that long-term real economic productivity remains impervious to money supply alterations.
Keynesians
In juxtaposition, Keynesians, adhering closely albeit with caveats, introduce critical differences. John Maynard Keynes renunciated the idea of a straightforward M-P correlation due to the neglect of interest rate roles within the Fisher model. Keynes posited monies in circulation follow convoluted pathways, and market prices adapt distinctive patterns given variances in liquidity preference affected notably by future speculations, instabilities, and market emotions. Keynesians stress how such fiscal policies could potentially elevate short-term aggregate demand catalyzing rebounds towards full employment.
Knut Wicksell and the Austrians
Further deviating critiques arise from Swedish economist Knut Wicksell as well as Austrian school economists like Ludwig von Mises and Joseph Schumpeter. They acknowledged an upward pressure on prices from increased money supplies but highlighted skewed impacts within capital goods. Such economic stimulations often engrained misalignments, instigating business cycles and other systemic level discrepancies.
Sprouting Divergences Among Theories
Contrasted against static Fisherian models, Keynesian, Wicksellian, and Austrian approaches stand dynamic, contending various accommodative monetary policy nuances. Such theoretical retortion impacts practical economic directive considerations efficiently confronting emerging worldly fluctuations shaping indispensable economics understandings conclusively.
Related Terms: monetarism, economic models, money supply, inflation, Fisher equation.
