Here, Mises discusses Smith, Say and recession:
“Whenever business turned bad, the average merchant had two explanations at hand: the evil was caused by a scarcity of money and by general overproduction. Adam Smith, in a famous passage in “The Wealth of Nations,” exploded the first of these myths. Say devoted himself predominantly to a thorough refutation of the second.”
Can someone point me to the passage where Smith explodes the myth, or link to an article that explains the gist of it
I’m not sure there is any one passage that explodes this myth but rather an entire section of Wealth of Nations called something like “on the mercantile system” which is devoted to it. To me he spends a lot more time attacking protectionism than money creation but when he tackled the money problem he just used common sense to figure it as being wrong. He just said that money is like a circulatory fluid or an alphabet and that any increases in it would only make the circulation of real wealth expressed in more metal and that if a country has more money than it can market in its borders, its just going to sell it outside even if the death penalty is involved.
Cheers for this…I’ve glanced through it…pretty lengthy.
I’d still like to know a precise source if anyone knows.
Also, Murray wrote:
Does anyone know where the Keynesian/Monetarists claim this would happen? (No, Murray doesn’t cite a source)
He could hardly have proved it. Imagine if tomorrow all money holding shrinked to 1/100th. All cash and bank accounts. Would there be no recession?
Well, if everyone had less money then no, in this case the super-neutrality of money would actually work. Or am I wrong?
Perhaps Smith meant what Say wrote later as:
“Thus, to say that sales are dull, owing to the scarcity of money, is to mistake the means for the cause; . . . . Sales cannot be said to be dull because money is scarce, but because other products are so. There is always enough money to conduct the circulation and mutual exchange of other values, when those values really exist.” http://mises.org/journals/scholar/sayslaw.pdf
If all money holdings shrunk equally by 99%, then there would not be a direct effect on a free market economy in the typical form of a recession, but neither does this imply the so-called “neutrality of money” which, though based on a better understanding of economics than many different theories, still falls to prey to a vicious fallacy. This brings up RMT’s comment:
The problem with the “neutrality of money” doctrine was that it blithely assumes that any change in the quantity of money affects off monetary holdings, and thus all prices, equally. This is, in real economies, not true, though in the above example where all monetary holding shrunk by 99%, it would in fact be true. The “neutrality of money” theory was however, based in the correct deduction that the role of money in an economy was one of a medium of exchange, and that ultimately the purpose of exchange was not the simple acquisition of the medium of exchange itself, but the acquisition of other real goods and services which that medium of exchange could be traded for. This is the essence of Say’s Law, which is fundamentally true. It is, however, false to deduce “neutrality of money” from Say’s Law, because nowhere is it inherent in Say’s Law is the assumption that the medium of exchange cannot affect the exchange ratios between goods and services. Recognizing that changes in the medium of exchange can, when these changes do not occur equally across all monetary holdings simultaneously, affect these ratios of exchange is one of the crucial Austrian insights into economics. Austrians recognize that the neutrality of money is a false doctrine. This is, for example, the basis of Austrian Business Cycle Theory.
But back to the first example, what exactly would happen if all monetary holdings were reduced by 99%? Well first of all, there would be no significant changes in relative prices: all prices would quickly, and at about the same rate, fall to 1% of their former height. The primary cause of the business cycle, the distortion of relative prices caused by uneven changes in the quantity of money, would not be present. However, how this change would affect outstanding debts in the economy might have some other effects. Eventually, unexpected transfers of wealth that are not expected to occur do not have an effect on economic activity, because human action is necessarily future oriented and individual’s debts and obligations affect their ability to seek profit from price differentials on the market. However, the immediate effect of a reduction of all monetary holdings by 99% might have effects based on the fact that it would impair the operations of the current profitable players (would often have large amounts of debt) in the market and would instigate a shift in the firms and individuals involved in certain industries. And naturally, this shift would entail transaction costs which could cause a dip in economic activity.
No. As our man Rothbard explains clearly in what has gov done to our dough, money is not like food or housing.
To put in in my own words because it’s more fun,If 99%of the food in the world was destroyed, there would be nothing to eat. Same with housing etc.
But if 99% of the cash in the world disappeared, people with things to sell would still have to sell tehm. The farmer can’t eat all his bananas. He has to get rid of most of them or watch them rot. If EVERY LAST PERSON ON EARTH or even in the USA, came in told him, “Sorry I can only pay you a penny instead of a dollar. It’s alI can afford,” he would have to accept the penny.
He in turn would go the movies and tell the theater owner, “I can only afford to give you a penny for every dollar I used to give you.”
“I’ve been hearing a lot of that lately. Well, I have no choice do I? Everyone is saying the same thing. OK in you go.”
And similarly all over the place. Everyone is happy, nobody loses anything.
Of course if by “recession” we mean “the price of everything is 100th of what it use to be”, yes that would happen. But so what?
In fact someone might have the bright idea of saying “What’s in a name? Let’s just rename those copper coins dollars, add two zeroes to every paper dollar, and we are right back where we started. Everyone is happy.”
Wrong. There would be quite a big recession.
That assertion looks pretty bare at the moment.
But getting back to the titular issue, I have found two passages in Adam Smith’s Wealth of Nations that seem to touch on the issue of the amount of money in the economy not determining economic welfare.
The first is in I.5.15-17, where Smith talks about the labor theory of value, in which it is implied that the quantity of money does not determine economic welfare. He says near the end of this section:
“Labour, therefore, it appears evidently, is the only universal, as well as the only accurate measure of value, or the only standard by which we can compare the values of different commodities at all times and at all places. We cannot estimate, it is allowed, the real value of different commodities from century to century by the quantities of silver which were given for them.”
The second is in II.II.19-21, where he says that a person’s revenue is determined in real terms and not simple the amount of money that one gets. As written:
“Though we frequently, therefore, express a person’s revenue by the metal pieces which are annually paid to him, it is because the amount of those pieces regulates the extent of his power of purchasing, or the value of the goods which he can annually afford to consume. We still consider his revenue as consisting in this power of purchasing or consuming, and not in the pieces which convey it.”
So perhaps there may be some place where Smith explicitly states that recessions aren’t caused by a scarcity of money, but this is a particular implication of these two passages wherever he essentially references what we know as Say’s Law. I essentially think that Mises did not accomplish much when he tried to differentiate between the idea that money is too scarce and the idea that goods are too plentiful: they are simply two sides of one coin. Proving one of those theories wrong also proves that the other one is incorrect.
i’ve heard the same thing before. generally its understood that Smith provided an explanation for the economy that was more advanced than the medieval economists who would blame stuff such as the scarcity of money, specie, or some other debt instrument. Smith was a capitalist, and believed recessions were a complex speed bump in the means of production, Smith’s work covered the need for capital accumulation to grow an economy and limit recession.
I cant give u a specific passage, becuase ive never read the guy, but Smith would argue something along the lines of: the cause of recession is not the lack of money, but rather the fall in production
I did not say on a free market there would be a shortage or surplus of money causing problems. Artificial shortages or surpluses induced by intervention can lead to recessions however.
Outside of loans, contracts, and other entangling agreements, would any other complications arise from such a drop? I imagine the problem of sticky prices would pop up, in at least the short term. I imagine union labor would be unhappy about such a large nominal wage cut, and employers might be in medium or long-term agreements with them.
In my view, there would definitely be a recession, although we can only speculate at how large and for how long. I think it would be catastrophic in the very-short term.
Does anyone know where I can find Smith’s quote? I’d like to hear what he said.
According to a footnote in Hazlitt’s “The Failure of The New Economics”, It should be in the Wealth of Nations - Vol. I, Book IV, Chap. I (Edwin Cannon edition, 1904), p.404
Thank you.
EDIT: oops, didnt notice the age of this thread