Increases or decreases in the demand for money, other things being equal, lower or raise the overall level of money prices, but real consumption and investment as well as the real consumption/investment proportion remain unaffected; and, such being the case, employment and social income remain unchanged as well. The demand for money determines the spending/cash balance proportion. The investment/consumption proportion, pace Keynes, is an entirely different and unrelated matter. It is solely determined by time preference (see Rothbard 1983a: 40–41; Mises [1949] 1966: 256).
I think I’m following here but wanted to check. I imagine a simple non-Bastiat analysis of the situation would be to say that if a bunch of people reduce their consumption (let’s say of wheat) then this will cause a drop in demand for wheat which will serve to lower the prices and bring about reduced investment in wheat.
The extended Bastiat/Hazlitt analysis would be that the increased cash balances of these people would serve to increase the amount of funds available to be borrowed and thus drive down interest rates which would serve to encourage investment by precisely that amount - although not necessarily in wheat (the new investment might be made in tomatoes or silicon chips or something entirely unanticipated elsewhere in the economy).
Have I understood this correctly or is this way off base?
i could be misunderstanding, but at first glance it seems they are just describing that the nominal price level in some unit of accounting (i.e. so many ounces of gold per each unit of economic goods available for purchase) doesnt directly reveal information about real wealth, real production, or ;real prices’ if you will. so if people everywhere kept twice as many money-units available on hand, at anyone time, each money-unit would simply purchase what half the old money-units used to purchase. its an exposition of the quantity theory of money?
I don’t think so no - earlier in the essay he makes a special point of covering exactly this and explicitly states that the level of money in the economy does not affect and is not related to interest rates at all… all it will determine is nominal prices.
Here, however, he’s talking about changes in the demand for money - i.e. a desire to keep higher cash balances. Usually that would occur when people were less certain about their requirements for the more immediate future (and thus wanted to keep a greater source of liquid, easily convertible, savings on hand). One of the consequences of an increased demand for money, of course, is that this comes at the cost of a decreased demand for other goods and services in the economy and so the money prices of other goods will fall.
What I’m wondering is how it is maintained that a fall in the money prices of goods in the economy will not be accompanied by a reduction in investment. Certainly long term this might not be expected - the quantity of money in circulation has changed and prices have dropped and thus investors will merely need to borrow and invest lower nominal sums to effect exactly the same real investments that they would previously have effected with higher nominal sums. But at least in the short term, there must be some appreciable change in real production that results from a change in consumer preferences (from a desire for consumer goods to a desire for higher cash balances). Surely at least in the short term, this will result in lower profits and a reduction in investment - which can only be offset by something like lower interest rates???
Maybe I need to read the passage that he references from Mises/Rothbard though, rather than guessing at what he means. It doesn’t seem clear to me from the essay, in any case.
perhaps we turn our attention to why the demand for money has increased. if its arbitrary for no reason, then my initial analysis stands. if its because of interest and/or inflation (or some other reason, monster from space destroying factories, or building new ones), then the demand for money change is one effect of a more root cause, that it self can cause other effects, like a change in the savings/consumption ratio. i.e. any change in savings/consumption has its explanation somewhere other than demand for money.
Increases or decreases in the demand for money, other things being equal, lower or raise the overall level of money prices, but real consumption and investment as well as the real consumption/investment proportion remain unaffected; and, such being the case, employment and social income remain unchanged as well. The demand for money determines the spending/cash balance proportion. The investment/consumption proportion, pace Keynes, is an entirely different and unrelated matter. It is solely determined by time preference (see Rothbard 1983a: 40–41; Mises [1949] 1966: 256).
My understanding of this is that if I decide to keep a larger cash balance but maintain my old consumption/investment proportions there will be no resulting change in the structure of production, only a change in the general price level.
So, e.g., suppose I currently I have a $10 cash balance, and that every two weeks I get a $10 paycheck. Every time I receive that $10 paycheck I invest $4 and spend the remaining $6 on consumption goods (to get by for the next two weeks). My investment-consumption ratio is then 4/6 or 2/3.
Suppose then that times have gotten uncertain and I decide to, upon receiving my $10 paycheck, add $5 to my cash balance. For the other $5 I invest $2 and spend $3 on consumption goods. Thus, my 2/3 ratio remains. There will thus be no change in the structure of production.
Investors and consumption goods producers will experience a fall in demand to the tune of the $2 and the $3 that I now I have in my cash balance. But there will be no forces which change relatively and therefore no greater demand for the factors of the consumer goods producers or for the factors of the producers goods producers.
I think this is right but it’s so laden with assumptions about a pre-existing equilibrium, ceteris paribus conditions, (homogeneity of goods?) etc. that I think Hoppe and Rothbard should treat it a little bit more carefully. It’s one of the most fundamental criticisms of Keynesianism though.
Hm, this is quite different from the Hayekian criticism of Keynes… Hayek was saying the increased propensity for savings would serve to lengthen his production triangle and so would, most definitely, result in a change in investment (the “I” in Keynes’ C + I + G) which is what Keynes didn’t account for.
I think I’m going to have to read Rothbard on this one to see what he’s talking about - Hoppe’s argument just isn’t well enough fleshed out. Hopefully Rothbard explains himself a little better.
Yeah that argument is much different from Hayek’s. Hayek’s argument is all about the paradox of saving. This argument just deals with whether there is any necessary implications for the ineterest rate when changes in a person’s cash balance take place. Keynes would have it that there is where Rothbard, Hoppe, et al, would say you can add to your cash balance without changing the interest rate.
Rotbard especially emphasizes there are 3 things you can do with newly received money. 1. Add to cash balance 2. Purchase Con. goods 3. Invest or purchase producer goods (ie, abstain from consumption for some stipulated term.(MES 785-792)
I think Rothbard is perfectly right but he should reiterate that he’s talking about a genuinely free market. In our non-free fract. reserve system, increasing your cash balance would have implications for the money interest rate (not real) since bankers engage in the creation of arificial money claims. At least I think so.