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Demand for money? My understanding is that money is a medium not a commodity. Demand for capital makes sense, but capital is not always money. If my understanding is correct, then wouldn’t treating money as a commodity lead to all kinds of calculation nightmares?
I’m not debating, I’m asking a question. All answers are appreciated.
Yes, the concept is ambiguous/ill defined. That’s why people who advocate FRB use it.
Well, money can be a ‘real’ commodity - gold for instance. When a real commodity is used as money you have what’s usually called commodity-money (as opposed to fiat/paper money or fiduciary media)
The crucial point is that commodity money has value for two different reason
- it’s a medium of exchange and
- it’s a commodity.
whereas ‘other’ monies have value only because they are conventionally accepted. In the case of fiat money, it’s accepted because the government uses force and fraud in order to get people to accept it. In the case of FRB tickets, the bankers rely more on fraud than force, although banking has always been a privileged industry - privileged meaning shielded from competition by violence.
Appeal to authority: http://www.youtube.com/watch?v=fXqc-yyoVKg&feature=sub
He supports free banking but shits on the mechanical approach to the quantity theory (something he did in both Monetary theory of the trade cycle and Prices and production). The position held by many, namely that Mises/Hayek supported free banking because of FRB is simply not true. That would be like saying that Marx supported capitalism because he believed it would lead to long term economic prosperity. This is obviously not the case; Marx supported capitalism because he believed it would destroy itself and eventually lead to a socialist utopia. Likewise, Mises/Hayek believed that free banking would eventually lead to a 100% reserve system, due to its inherently self-destructive nature (something Austrian theory and history demonstrate).
Money provides more liquidity than other assets, so the demand for money comes from people choosing how to store their wealth.
Yes, when it suits you. When it doesn’t you switch back and begin talking about the “real economy” and “real goods”. Look, in a monetary economy in which the market for money also serves the purpose of the market for time and disruptions will have economy wide consequences. What’s important to remember is that when the price of money adjusts it does so through a long series of changes in the relative prices of various goods and services. As a empirical and theoretical matter, this doesn’t happen instantly and it certainly isn’t neutral. So when the demand for money increases, if it isn’t offset by an increase in supply of money there will be macroeconomic consequences. However, you would rather forget changes in the demand for money and wish to continue talking about real goods only to talk about relative prices once the supply changes!
This is one of the biggest problems with anti-FRB Austrians, it’s not consistent with Austrian theory. Inflation, of any form, is disasterous, deflation is perfectly acceptable and even desirable. Changes in the demand for any good should be met with changes in supply, not so with money. Every market functions best when the workings of that market are left to the free decisions of entrepreneurs. Money, on the other hand, needs to be guided by legal rules.
Esuric, really, you’ve gone MIA everytime we’ve had this debate before, I’m not going to try again. Picking a piece of Hayek’s writing and saying “Look! He always hated FRB” is dishonest.
Incoherent macroeconomic mumbo-jumbo, completly at odds with methodolgical individualism.
Right. Maybe you need to learn some real economics.
its really incredible to me how GIles can ramble on for days about demand for money etc, and never mention purchasing power of money; as if it is irrelevant
every market functions best when the working s of that market are left to the free decisions of entrepeneurs under the guidance of legal rules (rulings and enforcements to be provided/supported by freemarket institutions). as such money is no different.
At this point it’s really boring. Sorry!
Nobody argued against the market responding to a demand for anything. And that includes money. But the moment you create money out of thin air and inject that money into a specific point, say cars, you will distort the price signals of cars. Prices of cars will rise and create a bubble in car prices. It is only later as the money cripples through the economy when prices of all other goods adjust, that the car bubble has deflated and the new prices of cars reflects the old demand again. But the new money that caused the bubble is indistinguishable from older circulating money. As far as entrepreneurs are concerned, there is a real shift in demand for more cars. Car manufacturers will start to recruit additional resources to expand production, investors will channel their savings into the car industry. Do you see the misallocations now? Do you see that as the money cripples and prices of other goods rises, the increased demand for cars will be discovered to have been a bubble? It doesn’t matter if you argue that the public wanted to hold cash or not. The money entering the car industry will create a bubble.
You cannot satisfy an increase in demand for money in such a way without a boom/bust cycle, unless you somehow sprinkled money from the sky so everybody receives an increase in money in proportion to his previous income.
Let the market handle the money supply! All I’m saying is that it will not be banks creating money out of thin air that satisfy such a demand.
on a more humorous level, though maybe I should be scared - idk - I remember when Giles said he would like to work for a central bank. I think he’s prepping. If he would have learned from the best, but there is still more time, he would talk like Greenspan more and mix it up. Make it sound like he actually said something but meanwhile he was only ordering pizza.
The purchasing power will decrease only if the supply were to increase sharply in excess of demand. This is true of all goods.
To DD5:
Read more Mises, the money isn’t made out of thin air!
non-sequitur
Because I’m not explaining why Giles didn’t mention the purchasing power or what?
Other goods don’t have purchasing power as they’re not media of exchange…
All goods potentially have purchasing power. Restaraunt owners donate free dinners to charity auctions, tattoo artists often give tattoos in trade, car dealers take in old cars in exchange for a reduced price on a newer ones, and on and on…
They can still be used in exchange.