Classical quantitative theory of money: reasons for its appearance, basic postulates and their evolution
For centuries, the fundamentals of how money affects the economy belonged to the belief system known as quantitative theory of money… This system is quite complex and means different things for different authors.
It should be noted that the quantitative theory of money is now dominant. According to this theory, the value of money and the level of commodity prices change depending on the amount of money in circulation: the more there is, the higher the prices of goods, and the lower the value of money, and vice versa.
It should be noted that the quantitative theory of money includes two basic provisions:
- the principle of causality, that is, a change in the prices of goods is explained by changes in the amount of money in circulation;
- the principle of proportionality, that is, the prices of goods change in proportion to the change in the amount of money in circulation.
The quantitative theory of money has come a long way in its development. Distinguish between early and modern quantitative theory of money. The general assessment of the early theory boils down to the following: it remained mechanistic, that is, simplified, represented the relationship between the amount of money in circulation and the level of commodity prices, and only at the macroeconomic level, did not study the processes that occur within economic entities. The second stage in the development of the quantitative theory of money began at the beginning of the 20th century, when gold coins began to be squeezed out of circulation, money irredeemable for gold began to appear more often, and it became obvious to an increasing number of economists that money played an active role in price formation, that the factor of their quantity influences the change. commodity prices.
The neoclassical version of the development of the theory. I. Fischer s “Transactional Option”. “Cambridge version” of quantitative theory
It should be noted that the first who made an attempt to clearly formulate the relationship between various key factors of the monetary and non-monetary spheres in the quantitative theory of money was the American economist I. Fisher. He put forward transactional version quantitative theory based on the so-called “equation of exchange”:
M – the mass of money in circulation during a certain period;
V – the speed of circulation of the monetary unit;
R – the price of an individual product sold during the specified period;
Q – the total mass of goods (physical), sold in a given period.
I. Fischer concluded that R directly depends on M… Prices can rise with the same amount of money, that is, the price is affected by the number of goods manufactured and put on the market:
I. Fischer studied all factors of price changes, but gave preference to M;
V – derivative factor, it is formed depending on M and from the state of the sphere of circulation. I. Fischer s merit lies in the fact that he drew attention to M… Is of great importance Q, because the V and the production of goods can change by themselves, regardless of the change M under the influence of technical progress, social division of labor, human psychology and other factors not directly related to the money supply.
Subsequently, on the basis of the transactional version of the quantitative theory of money by I. Fisher and in connection with the criticism of this version, a group of professors of the University of Cambridge (A. Marshall, A. Pigou, D. Robertson) formulated their version, called “Cambridge version”, or the theory of cash balances. In contrast to I. Fisher s version in the “Cambridge version”, the approach to the problem is not macroeconomic, but microeconomic. Cambridge economists focused their attention on the motives of the accumulation of money by individual economic agents, having come to the conclusion that they have a constant desire to accumulate money, that is, on the one hand, to have a reserve stock of means of payment in order to pay off all their obligations, and on the other – create a safety stock of resources in case of unforeseen circumstances. Cambridge economists have given a new formula for the relationship between money and prices:
M – cash balance (mass) of money from economic entities;
R – production of products in physical terms for a certain period;
R – the average price per unit of production;
k – part RРthat economic agents want to keep in the form of money (cash balance).
It should be noted that Cambridge economists concluded that between M and R there is a connection and this connection is affected k…
D. Keynes s contribution to the development of the quantitative theory of money
J.M. Keynes also contributed to the development of the quantitative theory of money. In his early works, he supported the Cambridge version, and later formulated his own version. He connected the quantitative factor of the money supply with real reproduced processes and, through them, traced the connection between the amount of money and the prices of goods. Keynes, in contrast to the Cambridge economists, found this connection through the bank interest rate. In the theory of J. Keynes, it is substantiated that the mass of money (M) is not so directly related to prices as before, but it is related through the mass of income and the rate of interest:
M – a lot of money;
q – total income;
j – income that was formed in connection with the rate of interest;
Lone and L2 – demand for money; L2 called speculative income, which is received from the bank interest.
It should be noted that in the 50s of the XX century it was obvious that countries with market economies are involved in global inflation, which was mentioned in the programs of many Western countries. Scientists are trying to find its reasons in Keynesian statements, that is, in the proposition that any income can remove the pressure of the mass of money on prices. The neoclassical quantitative theory of money was revived in the form monetarist theory, whose main representative is the American economist M. Friedman.
Modern monetarism as an alternative direction of quantitative theory
Accusing J. Keynes of justifying the policy of inflation, modern monetarists again returned to the analysis of the direct relationship between money and prices at the macro level, arguing that an increase in the mass of money leads to an increase in prices. In conditions when the market mechanism is actively operating at the global level, economic cycles fade away, and all economic indicators change moderately, the physical mass of goods (Q) to be implemented becomes manageable, prudent, predictable; monetarists can predict growth Q by 1, 2, 3, 4, 5 … percent. The main factor here M, which is in the hands of the government – the issue of money. Monetarists argue that it is not necessary to engage in the same processes as the Cambridge economists. “M“At the price level (R), which have developed and “V“Production, which is or will be, is the theory of the place of money, monetary policy in economic theory.
M. Friedman developed appropriate recommendations for the government on monetary policy. He calculated that if in the USA “M»Annually increased by 4%, then prices would be stable, that is, 3% for an increase in production, 1% for a slowdown in the velocity of money supply.
Interestingly, Margaret Thatcher borrowed these ideas and brought the UK out of a difficult economic situation. Modern monetarism is characteristic of a highly developed market economy.
Keynesian-Neoclassical Synthesis of Monetary Policy
The essence of the synthesis lies in the fact that, depending on the state of the economy, it is proposed to use either Keynesian recommendations of state regulation or the recommendations of economists that defend the idea of limiting state intervention in the economy. They considered monetary methods to be the best methods. It was believed that the market mechanism is capable of itself establishing a balance between the main economic parameters – supply and demand, production and consumption.
The imitators of the ideas of neoclassical synthesis (J. Hicks, P. Samuelson and others) did not exaggerate the regulatory possibilities of the market. They believed that as the complexity of economic relationships and relations, it is necessary to improve and actively use various methods of state regulation.
School neoclassical synthesis is distinguished by the expansion of research topics:
- a number of works on the problems of economic growth have been created;
- methods of economic and mathematical analysis have been developed;
- the theory of general economic equilibrium was further developed;
- a methodology for analyzing unemployment and methods for its regulation is proposed;
- the theory and practice of taxation has been thoroughly studied.
Monetary Policy in Transition in the Light of Modern Monetarist Theories
Politics – the activities of social classes, parties, groups, is determined by their interests and goals, as well as the activities of state authorities and government, reflecting the socio-economic nature of a given society; it is the art of government.
Monetary (monetary) policy – This is the coordinated activity of state authorities on money management, which, using certain, specific mechanisms of work, is aimed at achieving predetermined macroeconomic goals.
The economic content of economic policy is as follows:
- Monetary policy is one of the sectors of economic policy of the highest bodies of state power;
- The highest bodies of state power regulate money as a system of relations between the subjects of the economy;
- Regulation of money is one of the mechanisms of government influence on:
- the nature (quality) and volume of the exchange of goods, works and services between economic entities;
- the dynamics of the distribution of the created added value to end consumers, expenditures in general and gross fixed capital formation, changes in inventories, the acquisition (excluding disposal) of valuables, net exports, the proportion of the distribution of total final consumer expenditures to the total final consumer expenditures of households, commercial organizations , the general government sector.
- Monetary policy is provided by its inherent monetary mechanisms.
The highest ultimate goal of monetary policy is to ensure price stability, full employment and real output growth.