It’s mystical as far as you can do anything usefull with it. Even if you cosntructed similar indenties for single goods in the market , you still couldn’t do anything with it until after the quantities have been measured since the magnitude of the variables are a result of individual human action.
In this case, All quantities except for M cannot even be measured.
You can’t add quantities with different physical units. You cannot add 4 chairs + 4 tables +7 barrel oil + 32 hours of doctor fee + … If you’re going to put something in the form of mathematics and expect it to be useful (even in a hypothetical sense), then you should at leas work with a valid equation.
So, what is Velocity? Does it have a proper physical definition or not? And don’t go around in circles defining it in terms of one thing, and then defining tht thing in terms of V again.
Nobody is denying the truism that there is a relationship between money supply and prices. But the attempt to expose this relationship on the hypothetical aggregate price level in mathematical formula is meaningless. The prices are determined by individuals on the market. How they (individuals) react to an increase in money supply, i.e., how they change their preferences between different goods or even between consumption and savings, and how those changes are interrelated is impossible to capture in any formula.
Someone previously quoted maybe Rothbard, where P and Q were vectors, not aggregates. Prices are multiplied by quantities exchanged. So the unit of terms that are added is dollar and there is nothing wrong with it.
What is the demand for milk equal to? Read you man Rothbard on this.
It’s an identity, not an equation. Whilst it may be useful for empirical research this is an entirely different question from whether or not the identity is a useful analytical tool. The whole of Austrian theory can’t be “scientifically tested” is it mystical?
Why does it matter what the “real cause” of inflation is or is not, or who is right or wrong about the "real " cause?
Inflation [i.e. a decrease in the general purchasing power of each unit of a fiat currency] , as an economic phenomena, exists, as does deflation, as do all economic/market phenomena over time in the real world.
In the real world, relative values of all goods ,services ,and “mediums of exchange” [i.e. “money”] constantly change- it is the ultimate “market phenomena” if you will.
Would knowing the “real cause” of inflation somehow enable one to prevent this natural phenomena from occurring?
Wouldn’t you all be better off learning how to protect yourself from the effects of inflation, rather than agonizing over its “true” cause according to some dead [or even some still living] economist?
Supply creates its own demand. Until the entrapranuer makes his descision regarding supply in order to seek maximum profit, there is notihing you can say about it using an equation. The equation is useless to show that money can somehow be created out of thin air but be productive. Your milk example proves the point. You construct such exchange equation for anything: For milk, bagels, cars, etc… What good are accounting truisms until after transactions have take place?
It doesn’t need to be tested because it does not attempt to explain complex causal effect using mathematical equations. The relationship between the money supply and prices can be logically deduced. You construct a hypothetical equation to show this relationship but that is all you can do. You cannot use the equation in any scientific manner.
It is exactly the fact that Austrians usually avoid such equations that keep them away from this mystical realm.
Garrison does use this equation in “Time & Money” but only in the context of explaining moneterism. He does not use it in order to explain Capital Theory or the Business Cycle.
OK, well, you’ve only betrayed your lack of knowledge here. The identity of exchange doesn’t purport to explain any causal phenomena, it is merely an analytical tool that can be used by the economist. So perhaps before making such grand claims as that those Austrians who do make use of it are “high” (is Salerno high? he tried putting Rothbardian theory into mathematical terms) you should learn the context in which Austrians use it.
Ironically, by sheer acidient, Frank Shostak makes this same point today about how you can’t quanify such a sum, but relating to savings:
"What matters for economic growth is the amount of total real savings. However, it is not possible to quantify this total.
To calculate a total, several data sets must be added together. This requires that the data sets have some unit in common. There is no unit of measurement common to refrigerators, cars, and shirts that makes it possible to derive a unified “total output.”
The statisticians’ technique of employing total monetary expenditure adjusted for prices simply won’t do. Why not? To answer this, we must ask: what is a price? A price is the amount of money asked per unit of a given good.
Suppose two transactions were conducted. In the first transaction, one TV set is exchanged for $1,000. In the second transaction, one shirt is exchanged for $40. The price, or the rate of exchange, in the first transaction is $1,000 per TV set. The price in the second transaction is $40 per shirt. In order to calculate the average price, we must add these two ratios and divide them by 2. However, it is conceptually meaningless to add $1,000 per TV set to $40 per shirt. The thought experiment fails."
what was “Thus QP=$4×7.5+4×20+7×72.5+32×130=$4777.5”?
Very nice! You dropped the units of the different goods so you’ve solved the impossible algerbaric problem. Why is this valid? Oh, because you’ve seen others do it.
Quantity theory of money. Simply stated: The theory that changes in the quantity of monetary units tend to affect the purchasing power of money inversely, that is, with every increase in the quantity of money, each monetary unit tends to buy a smaller quantity of goods and services while a decrease in the quantity of monetary units has the opposite effect. Knowledge of the effects of changes in the quantity of money is vital to an understanding of the theory of money, one of the most misunderstood economic problems of our age.
In 1568, Jean Bodin (1530-1596) pointed out that one reason for the then-recent rise in prices was the greater abundance of money due to the discovery of silver in America. He reasoned that since an abundance of anything made its value fall, this was what had happened in the case of money. In 1588, Bemardo Davanzati (1529-1606) espoused the first crude quantity theory of money by equating the total quantity of monetary metal to the total of all things able to satisfy human wants and then reasoning that the prices of available commodity units were proportional to the available quantity of monetary units. Later versions of this crude theory equated the quantity of money available or the quantity of money that changed hands (quantity X velocity), to the quantity of goods and services exchanged for money and maintained that changes on the money side of the equation resulted in proportional changes in the prices of all goods and services sold, i.e., a 20% increase in the quantity of money, or the quantity of money spent for goods and services would raise all prices proportionally by 20%. See “Equation of exchange.”
The fallacy of all such crude versions of the quantity theory is their holistic (see “Holism”) viewpoint of market transactions which ignores the fact that all changes in the quantity of money must start with changes in the cash holdings of some specific individuals and that it is through their subsequent market actions that the changes in the quantity of money set in motion their effect on price changes.
The refined and logically unassailable quantity theory of money traces the effect of every change in the quantity of money from its inception, as a change in the cash holdings of certain individuals, through the chain of changes in the prices these individuals pay and the effects such changes produce in the cash holdings and subsequent expenditures of other individuals until the full effect of the change in the quantity of money has spent its force and produced an entirely different set of price ratios or relations (price structures). Although a change in the quantity of money may eventually affect all prices, it does not and cannot affect all prices in the same manner, to the same degree or at the same time. The holistic idea that it does is false and has serious consequences.
QP= (4 chairs x $7.5) + (4 tables x $20) + (7 barrels of oil x $72.5) + (32 hours of medical counsel x $130) = 4 chairs + 4 tables + 7 barrels of oil + 32 hours of medical counsel
Look, 3 chairs x $ 100 per chair must necessarily be denominated in [CHAIRS.$] units. You can even give the unit a name. The scineram is defined as the amount of $ needed to purchase a (‘standard’ ?) chair.
Now, that unit is different from, say, the [1ozMILK.$] unit. Or the [1bushelRICE.$] unit. Or the [PORSCHE928.$] unit…or…you get the idea ?
How, then, account for the general acceptance of the equal
sign and the equation? The answer is that, mathematically, the
equation is of course an obvious truism: 70 cents = 10 pounds of
sugar x 7 cents per pound of sugar. In other words, 70 cents =
70 cents. But this truism conveys no knowledge of economic
fact whatsoever.54 Indeed, it is possible to discover an endless
number of such equations, on which esoteric articles and books
could be published. Thus:
70 cents = 100 grains of sand x (number of students in a class)/100 grains of sand +70cents
number of students in a class
Then, we could say that the “causal factors” determining the
quantity of money are: the number of grains of sand, the num-
ber of students in the class, and the quantity of money. What
we have in Fisher’s equation, in short, is two money sides, each
identical with the other. In fact, it is an identity and not an
equation. To say that such an equation is not very enlightening
is self-evident. All that this equation tells us about economic
life is that the total money received in a transaction is equal to the
total money given up in a transaction—surely an uninteresting
truism.