[P2P-F] Fwd: The Quantity Theory of Money is the Flat Earth Theory of Economics.

Mon Jun 10 14:11:11 CEST 2013

Hello friends,

I think this is a very imaginative explanation of the Quantity Theory.
Thanks for sending it. While I agree with this explanation, I have to add
that the Quantity Theory can be reformulated in a a way in which the
velocity is constant. You can find it in Richard Werner's article in the
International Review of Financial Analysis (2012) "Towards a new research
programme on Banking and the Economy".

Basically, this author has found empirical evidence that credit devoted to
GDP-transactions (productive economy) is linked to nominal GDP. As money is
created by bank loans, it is possible to reformulate money (M) as
Credit-money, and when this credit is devoted to the purchase of goods and
services (and not to financial transactions, like assets or equity) there
is a strong correlation with nominal GDP (PQ in the Quantity Theory). So
velocity (V) is quite constant for this new money aggregate: credit-money
devoted to GDP-transactions.

I'm using this in a paper I'm presenting at the Political Economy
conference in The Hague in July.
I hope you find it useful too.

Susana

2013/5/27 Michel Bauwens <michel at p2pfoundation.net>

>
>
> ---------- Forwarded message ----------
> From: Dmytri Kleiner/ Friends. <dk at telekommunisten.net>
> Date: Mon, May 27, 2013 at 10:31 PM
> Subject: The Quantity Theory of Money is the Flat Earth Theory of
> Economics.
> To: "Dmytri Kleiner/ Friends. Subscriber" <michelsub2004 at gmail.com>
>
>
> (Mailing list information, including unsubscription instructions, is
> located at the end of this message.)
> __
>
> There's old joke that you can prove that the earth is flat with a simple
> experiment you can do anywhere: Jump!
>
> Since scientists claim that Earth is rotating at a very high rate of
> speed, by simply jumping up as high as you can, you can prove it's not
> true! If the Earth were indeed spinning at such a fast speed, wouldn't you
> land hundreds of feet away instead of in the exact same spot you jumped
> from? Obviously the Earth is flat! QE god-damn D!
>
> Quantity Theory believers also often start with a similarly personal scale
> from which to understand a macroeconomic question. They have a fixed amount
> of money. Money, to them, is like a pile of stuff. If you imagine that
> everything else there is to buy in the world is a similar pile of stuff,
> then, obviously, if you take the total amount of money in the pile of money
> and divide it up by total amount of stuff in the pile of stuff you have the
> value of money.
>
> If you increase the amount of money, by, for instance (in the flat earth
> vernacular) "printing" it, each "piece" of money in the pile goes down in
> value, because the pile of stuff still has the same amount of stuff. "More
> money chases fewer goods" as they say.
>
> Joan Robinson frequently recounts that the great Michal Kalecki once
> exclaimed to her "I have found out what economics is; it is the science of
> confusing stocks with flows!" The trouble with the flat earth economists,
> is that they confuse the dynamic flows of production and consumption that
> make up an economy with static piles of stuff. Robinson further reasoned
> that "it is this confusion that has kept the Quantity Theory of Money alive
> until today."
>
> Just to start with, money is not something that is "printed," the physical
> number of paper bills or minted coins is simply an artefact of the retail
> demand for such bills to conduct cash transactions. Money is either spent
> into existence by the government, or lent into existence by the banks. The
> amount of money created by government spending is a matter of government
> policy, the amount of money created by banks is a matter of the level of
> qualified demand for borrowing there is in the economy. In neither case is
> there any pile of paper, coins, or anything else that limits how much they
> can spend or lend.
>
> A flat earth economist reasons that if more money is created ("printed")
> the value of money necessarily goes down. This would only be the case if
> the total number of things to buy where a fixed stock. Not only that, it
> also assumes that any new money would be necessarily spent on buying
> things, and these things are locally produced.
>
> In reality, of course, the number of things to buy is not fixed, in most
> economies, particularly in down-cycles, unemployment exists, and so does
> underutilized productive capacity. New money can be created in such a way
> so as to put more people to work and more capital to work to produce more
> things, as such, the flow of money and the flow of goods both increase.
>
> And of course, not all new money is spent on locally produced goods, thus
> newly created money is also sometimes simply saved, or used to repay debt,
> or is sent abroad and results in greater imports and foreign savings.
>
> When you add it all up, it becomes very clear that the amount of money
> that is "printed" (aka spent) by the government tells you very little about
> the value of prices on it's own, this can only be understood within the
> context of sectoral balances, taxation levels, unemployment, utilization of
> productive capacity and local and foreign propensity to save the currency.
>
> To put this in terms of macroeconomic identities, the quantity theory of
> money can be expressed as MV = PQ. M is the number of units of money in our
> pile of money, and V is the number of transactions that occur in a given
> period, this must, by definition, be equal to The Price Level (P)
> multiplied by the real GDP (Q), our pile of stuff.
>
> As Bill Mitchell argues, following Kalecki and Robinson, to render this a
> theory of inflation one has to assume that V and Q are fixed, in other
> words that propensity to save, invest and import never change and that the
> economy is always operating at full capacity. Since that is empirically
> demonstrable to be not the case, the assertion that an increase in M
> results in an increase in P is demonstrably not the case. This theory is as
> dead as they come.
>
> So what is the real reason that zombie economic theories like the Quantity
> Theory continue to stalk the earth when they have been unequivocally
> refuted ages ago? Remember that all money is created in one of two ways, it
> is spent into existence by the government or lent into existence by the
> banks.
>
> The Quantity Theory and the related monster mash of undead theories that
> go along with it are popular among proponents of social austerity because
> they falsely imply that "printing" money necessarily leads to inflation.
> This means that government should be artificially limited to spending only
> as much as it taxes. When tax revenues fall as a result of economic
> downturns, government should cut spending, just as the communities it
> serves need government spending the most.
>
> This is really a win-win for financial elites with lots of money! On one
> hand, the immiseration of workers by way of austerity allow capitalists to
> push for lower wages and benefits, as the workers are in a weaker position
> to resist, on the other hand, any without infusion of money from government
> spending, additional money needs be borrowed instead, thus increasing
> interest income for all those financiers smart enough to be very rich!
>
> The Quantity Theory of Money is nothing more than a fable invented to
> convince the whole of society that they should have less, so that the to
> very rich can have even more!
>
> In any case, as is is my tradition, I will bring a small pile of money to
> spend on a signification volume of beer on Tuesday night, so join me at
> Toronto Stammtisch at The Embassy in Kensington Market, the rest of the
> Telekommunisten crew and friends and will be at Cafe Buchhandlung in
> Berlin. Please come!
>
>
>
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