Home > Uncategorized > The Veil of Money

The Veil of Money

from Asad Zaman

Many leading economists have come to agree with Nobel Laureate Stiglitz that modern economic theory represents the triumph of ideology over science. One of the core victories of ideology is the famous Quantity Theory of Money (QTM). The QTM teaches us that money is veil – it only affects prices, and has no real effect on the economy. One must look through this veil to understand the working of the real economy. Nothing could be further from the truth.

In fact, the QTM itself is a veil which hides the real and important functions of money in an economy. The Great Depression of 1929 opened the eyes of everyone to the crucial role money plays in the real economy. For a brief period afterwards, Keynesian theories emerged to illuminate real role of money, and to counteract errors of orthodox economics. Economists believed in the QTM, that money doesn’t matter, and also that the free market automatically eliminates unemployment. Keynes started his celebrated book “The General Theory of Employment, Interest and Money” by asserting that both of these orthodox ideas were wrong. He explained why free markets cannot remove unemployment, and also how money plays a crucial role in creating full employment. He argued that in response to the Depression, the government should expand the money supply, create programs for employment, undertake expansionary fiscal policy, and run large budget deficits if necessary.   read more

  1. Paul Davidson
    April 26, 2016 at 10:44 pm

    The classical axiom called the neutral money axiom is the basis of the QTM . Neutral money assumes changes in the money supply affects only prices and not output and employment. In his 1933 article entitled “A Monetary Theory of Production” , Keynes explicitly indices he is working on a theory which will eliminate the assumption of neutral money.

    Keynes also overthrew the ergodic axiom when he argued in a 1 1937 QJE article that his general theory rejected the notion that decision makers could make accurate actuarial prediction of future outcomes by using the “probability calculus”. In the chapter entitled “The Essential Properties of Interest and Money” Keynes declares that one of the essential properties of all liquid assets is that they have a “zero or negligible” elasticity of substitution with producible durable assets. {The other “essential” property of all liquid assets is that their elasticity of production is zero, i.e., liquid assets are nonproducibles, so if the demand for additional liquid assets increases there is no increase in the demand for production and employment

    Thus Keynes’s general theory overthrew these three classical presuppositions.

    Note however, that the Federal Reserve via their QE policy assumes that m,oney is not neutral and that merely by increasing the quantity of money employment will increase and full employment will be achieved! The continuing GREAT RECESSION since 2008 shows this is not the case — that one must not only reject the neutral money presumption but also accept explicitly the “essential properties” of all liquid assets including money– so that QE without fiscal additional fiscal spending will merely create nonproducbile financial assets.

    Unfortunately Neoclassical synthesis Keynesians, New Keynesians, and even some Post Keynesian writers do not recognize the importance of these “essential properties” in developing Keynes’s explanation of involuntary unemployment and how to cure it.

    Especially in an open economy these properties become important. I suggest if you are interested you read my article entitled””Full Employment, Open Economy Macroeconomics, and Keynes’ General Theory: Does the Swan Diagram Suffice?” published by the Institute For New Economic Thinking , Working Paper Series No. 35, November 2015.

  2. April 27, 2016 at 4:12 am

    US President Franklin Delano Roosevelt (FDR) started his campaign with orthodox promises to balance the budget but converted to Keynesianism when faced with the severe hardships imposed by the Great Depression.

    A lot of people say this, but it isn’t really correct. His primary speech on the economy as a candidate was filled with balanced budget deficit terrorism. But he ended it with a very clear and unambiguous declaration that he would deficit-spend to end unemployment if necessary – as was clear to everyone. The first intentional peacetime deficit in the USA was decided in 1932-3, and was not the later response to the Roosevelt Recession, as most have it.

  3. April 27, 2016 at 4:27 am

    You conpersons don’t even often show inflation-adjusted asset price histories
    because they are bad advertising!

  4. April 27, 2016 at 7:21 am

    There is no such thing as an open economy. But Friedman and others sold this fairy tale with all the vigor and cunning they possessed. These three quotes from Friedman sum up that campaign.

    “There is one and only one social responsibility of business–to use it resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”

    “The Great Depression, like most other periods of severe unemployment, was produced by government mismanagement rather than by any inherent instability of the private economy.”

    “Society doesn’t have values. People have values.”

    If there is a more ominous and cold hearted set of notions about how civilizations ought to be organized I don’t know what they would be, except perhaps the ancient Persian god-kings or the Mayan god-kings. And on top of wishing upon all life on earth a brutal and depraved culture neither Friedman nor most of his collaborators ever offered any evidence from history or anthropology to support the claims they made. I’ve examined the questions about why they did it over and over. My best conclusion so far is some sort of mental defect or ignorance so great as to be almost immeasurable. My anthropology dissertation chair just concluded they are evil.

  5. April 27, 2016 at 8:58 am

    QTM is not a theory, is a tautology. The orthodox theory on QTM is that V and Q are constants, so no matter how you increase M, it will only have a reflection in real world’s prices and never output or Velocity. This has been proven wrong so many times that it is not worth discussing.

    What would be really worth is a research to find out how the different ways you can increase M have affected P and Q in the past: what were the circumstances (post-war or peace times, employment level, business profit rate, etc), in which way was money injected in the economy: public works, bond purchase, private asset purchase by the central bank, in different countries and times, the multiplier effect caused in each case… A summary of this kind would really help to understand in which circumstances and how an increase in M can lead to an increase in output and employment.

    • April 27, 2016 at 11:31 am

      I have argued here (http://www.paecon.net/PAEReview/issue70/Kowalik70.pdf) that the equation of exchange, no matter how simplified (even if it contains other errors such as assuming that the economic output remains constant in response to monetary expansion), is not a tautology, but conceals a profound truth that the value of money is not identical to the value of goods it exchanges for but signifies a mirroring effect or a nominal doubling of economic value by means of the medium of exchange. By calling QTM or Fisher’s MV=PT a tautology we obscure this truth.

      As for your second point I very much agree. Murray Rothbad may have done some provisional work in that regard if I remember correctly, but a rigorous analysis along these lines would be invaluable (and probably cheerfully ignored by our rulers).

      • Peter Whipp
        May 1, 2016 at 6:44 pm

        Who are our rulers?

  6. louisperetzperetz
    April 28, 2016 at 9:35 am

    The real economics theory is a dynamic’s one. That means there are never equilibrian between them. Money is always running. Keynes was right when he said that States and people have to spend money. That is what I say too in my book. (Economy, how to flip the table off), But I add a system’s theory, which is well known : “2 nd principle of thermo-dynamism”. There is one system, the monetarism, and plenties of other ones issued from it. I call it complexity of social-economics.(I apologise for my poor english)

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