orb@whuxl.UUCP (SEVENER) (02/01/85)
> Belated response to a posting by our esteemed economist, Danny Mck: > BASIC MONETARY THEORY-- > > M*f=nT > > In other words: the quantity of money in circulation (M) multiplied by the > frequency with which money changes hands (f) equals the aggregate nominal value > of transactions (nT). If this is not immediately obvious to you, try looking > at it this way: > > f=nT/M > > Next, > > nT=P*T > > That is: the aggregate nominal value of transactions (nT) is equal to the price > level (P) multiplied by the real value of transactions (T). Therefore > > M*f=P*T > > (This is called the "transactions version of the quantity equation of money"; > the transactions frequency is usually called "velocity", but that is a misnomer > which I choose to avoid.) From this, we derive > > dM/M + df/f = dP/P + dT/T > or > dP/P = dM/M + df/f - dT/T > > (This is called the "dynamic form of the quantity equation".) What is tells > us is that a change in the price level is brought about by > a) a change in the money supply, > b) a change in the frequency with which money changes hands, > or c) a change in the aggregate real value of transactions. > > Daniel Kian Mc Kiernan > 9120 Hawthorn Pt > Westerville, OH 43081-9605 What is wrong with monetary theory? The problem with monetary theory and much economic theory generally is that it is a theory divorced from reality. As Marx (and even those early bourgeois economists like Ricardo and Smith) would point out economics is not just an abstraction: it rests upon concrete material goods and the concrete actions of real people. Forgetting this fact one can launch into arcane discussions of the velocity of money and so forth. Such abstract theorizing is justified so long as it keeps its eye on the REAL WORLD. That is what science is about eh, trying to come up with theories to explain the REAL WORLD, not such interesting things as how many angels can dance on the head of a pin. (any impugning of religion is intentional) So for example, by simply talking about such an abstraction as "velocity of transactions" we can forget certain things: such as the REAL materials that are traded which require REAL raw materials which often turn out to be concentrated so that *IN REAL LIFE* there is an effective monopoly or oligopoly in their supply. We can also forget that the real purpose of economic activity is feeding, clothing, and otherwise supplying ourselves with concrete material goods. This can (and *has*) been accomplished in various ways without a market, i.e. without any transactions involving money. By presuming that all economic activity comes under the sphere of the market and thus is the only thing important, other activities often become devalued. For example, for ages mothers have fed their children from their own breasts.* Is this an economic exchange which comes under the realm of monetary theory? Should this activity be placed under the market? How about the supply of sexual activity? (*note: Nestle's would like to pre-empt this time honored method for profit...) What we have seen in the advance of Capitalism (as Marx predicted) is that more and more of life has come under the sweep of the market. We have all seen figures for Third World countries of a per capita income of $300 per year and such absurdities. The reason this figure is absurd is that regardless of the extreme poverty in the Third World, many activities are never oriented towards the market whatsoever. If a family grows its own food to eat, makes its own clothes and so forth then it has engaged in no market transactions and thus contributed nothing to GNP or anything usually measured or accounted for in economists monetary theories. In our own country of course over time more and more economic activities have come under the purview of the market. At one time kids and families did work at home. Is it necessarily progress to do work for a wage? tim sevener whuxl!orb