I thought the equation MV=PT was a tautology and therefore always true.
It’s a somewhat difficult question, because it isn’t really uniformly true for all Austrians. I mean, certain Austrians use it as an expositional tool (White, Selgin, Horwitz, Hutt, Garrison) when describing macroeconomic problems. For example Horwitz says that the point of monetary equilibrium is to keep P stable in response to changes in V by offsetting the changes with an increase of decrease in M. I think some Austrians would reject that it really says anything because it is a tautology and it gives a mechanistic impression of the economy. I think the difference lies not really in its validity but its usefullness. I’ve certainly found it useful in understanding various concepts but I don’t really think it explains anything on its own. For example, I know that ceteris paribus a change in M will increase P, but that doesn’t mean it gives an explanation of why that occurs (such an explanation must be sought elsewhere). There are also problems related to attempts to use it to quantify various changes and use it in empirical work. I know Rothbard has a critique of the identity, I personally don’t agree with all of it but you might want to read it to understand why some Austrians don’t find it very useful.
In my opinion a lot of Austrians simply reject it because it sounds to mainstream.
See
http://mises.org/rothbard/mes/chap11d.asp#13._Fallacy_Equation_of_Exchange #####################
It is my opinion that if you find the equation useful, you are misunderatnding the price mechanism of the market.
The equation gives, as someone has already said, a mechanistic view of the economy.
Such a view of the economy is not consistent with the causal-realist approach of Austrian economics. For example, the quantity equation can give some very weird conclusions, like, since money supply is directly related to the volume of goods in the economy, one might be tempted to conclude that increasing money supply can create wealth.
Other criticism is, suppose the money supply is doubled there need not be an exact doubling in the price level as the equation might suggest. But well, since velocity(which shows how many times the money is spend) as a factor is included, the equation could account for the reason why prices don’t rise exactly double. So I don’t think that’s a very good criticism.
And could you explain the reason for the same?
Jesús Huerta de Soto offers a criticism in his book Money, Bank Credit and Economic Cycles. I have “republished” the section on my blog: “A Critique of the Mechanistic Monetarist Version of the Quantity Theory of Money”.
you know things that are false.
It simply doesn’t consider human action, and it introduces a variable from quantum mechanics which has no real meaning in economics, namely, “velocity.” Velocity simply doesn’t exist, since money is never exchanged for money; V is basically T (transactions). Whenever things don’t go according to plan for the mechanical quantity theorists they blame “V,” for them, V=X. For example, an increase in the supply of money by 10% doesn’t mean an increase in the overall price level by 10% (assuming T is stable), and as such they arbitrarily blame “V.” The quantity theory is useful because it’s easy to understand, and explains that inflation is caused by exogenous changes, namely in the supply of money. Perpetual inflation has monetary growth outpacing price levels at the earlier stages, and then vice versa at the later stages (or what is called hyper-inflation). Simply put: the value of money is determined by the demand for that money and the supply of that money.
What? Tell me this is a joke, *ceteris paribus (*mainly the demand for money), an increase in the money supply will lead to an increase in prices. I don’t know what’s so difficult to understand about this. As people receive the extra money they won’t want to hold it, they’ll attempt to spend the money in order to get if off their balances, however in the process they’ll raise prices due to increased demand for goods. In doing so they’ll raise the marginal utility of money since more of it is needed to buy the same number of goods with this process continuing until the price level has risen to level consistent with equilibrium.
What is so objectionable about this? It’s standard price theory to be honest, and that means Austrian price theory too.
according to your friedmanite quantity theory of money (as opposed to the austrian quantity theory of money )if you are analysing changes in M, in a ceteris parabis manner, you cannot blithely say, that they will increase P. P may stay the same with V and/or T changing to accomodate. (besides which you said ‘a change’ in M without specifying whether its increasing or decreasing before deducing that it increases P, this would lose you marks in your econ exam papers)
Note the bolded part of my response:
and again in case you missed it:
My analysis was straight out of Man, Economy and State written by the great Friedmanite Murray Rothbard.
However, MV=PQ distorts a crucial fact: price changes do not occur evenly across all goods. The price of some goods will change more quickly than others, and the relationship between prices of goods after a change in supply will necessarily be different from the relationship between the prices before supply changed.
in the function y=x*z ceteris parabis. increases in Y necessitate increases in Z
in the function y=x*z ceteris parabis. increases in Y necessitate increases in X
Therefore
in the function y=x*z ceteris parabis. increases in Y necessitate increases in X and increases in Z
FALSE.
why does this argument fail? to answer that is to explain your fallacy since i followed your way of writing about ceteris parabis to derive this faulty argument.
Which is why he [Giles] fails to recognize that FRB causes a boom/bust regardless of the demand from money.
Wow, someone does not understand what the ceteris paribus assumption is.
How many pseudo-economists can dance on the head of a pin ?
How many?
i admit i may have commited two errors. firstly i have failed to articulate, and second and worse may have commited errors in trying to think up a way to illustrate a subtle issue. I did write too rashly.
back to the issues. MV=PT equation is not a superior ‘tool’ for the ceteris parabus analysis that needs to be done pertaining to the relationship between the supply of money and this complex aggregate known as the price level. the mathematical notation fools one into various misinterpretations.
indeed Giles was speaking of changing the supply of money, and doing ceteris parabis holding steady of other variables, he focused on ‘demand for money’ as the ‘main thing being held steady’ which is represented by what terms in the equation?
Well, that’s an empirical matter - we must collect statistical data before being able to give an answer.
Here’s his response: 1/V = k(demand for money), which is very convenient considering that V is not real.