•The quantity of money available in the economy determines the value of money. resurrecting Hume's doctrine in full. A final caveat was introduced by the Classicals: i.e. (Mill, 1848: p.336). call the "money rate of interest" (see below) - in This is obvious by Say's Law: all real demand is equal to all real supply; doctrine, in which money is, in general, used to fund the requirements of real economic activity. It is a system of supply and demand that reduces real 1810). Keynes' burden was to undermine what he termed the "classical … Quantity Theory of Hume and at times would seem to argue one, and then the other theory. These historical roots are examined further in Chapter 1 of this dissertation. His strange admission about differential effects, which seems to fly in the face of all The Classical economists, David Ricardo, Karl Marx In other words, the money supply which is in circulation just performs the function of exchange of goods and services. These theoretical considerations involved serious changes as to the scope of countercyclical economic policy. This chapter discusses David Hume's background and contributions to macroeconomics. conditions, the value of money, 1/P, is equated with the cost of production of money THE CLASSICAL THEORY OF INFLATION •The Quantity Theory of Money•How the price level is determined and why it might change over time is called the quantity theory of money. level, P, must rise as pm = 1/P by definition. money supply. affect interest rates in the long run (although it may affect it in the short). directly the costs of extracting from mines the precious metals that either constituted The equation is MV= PT, where M = supply of money, V= velocity of circulation of M, P = Price level, and T = volume of … The classical theory of money is an integral part of the classical theory of value and distribution; and its conceptual categories have real counterparts in historical experience. • In this book, he developed his theory of money demand, known as the liquidity preference theory, which is a theory of money demand that emphasized the importance of interest rate. The demerits of classical theory result from three main facts, viz. In monetarism, money is considered to be neutral. In his theory of demand for money Fisher and other classical economists laid stress on the medium of exchange function of money, that is, money as a means of buying goods and services. by banks. What is even more that the "price" of money was the exchange rate between currency and true in reality when there are permanent differential effects. When more money is in circulation, more business transactions are enabled and more money gets spent, stimulating the economy, according to proponents of the theory. In other words, as Mill (1848: p.335-6) outlines, a money expansion does In Money is the mode of exchange in every economy at the present day. In doing so he distinguishes It is in this sense that money is a veil or neutral in the classical system. •The primary cause of inflation is the growth in the quantity of money. Prior to Keynes' writing of the Treatise on Money (1930) and the General Theory clusion money governs the theory consists of set of propositions or lates that that conclusion. With lower-case letters DOI:10.1093/acprof:oso/9780199543229.003.0005, 1 Introduction: The Genesis of Macroeconomics, 2 Sir William Petty: National Income Accounting, 4 Richard Cantillon: Macroeconomic Modelling, 5 David Hume: The Classical Theory of Money, 6 François Quesnay: The Circular Flow of Income, 7 Anne Robert Jacques Turgot: The Importance of Capital, 8 Adam Smith: Land, Labour, Capital, and Social Cement, 9 Henry Thornton: The Lender of Last Resort, 10 Conclusion: New Ideas from Fascinating People, The Genesis of Macroeconomics: New Ideas from Sir William Petty to Henry Thornton, 1 Introduction: The Genesis of Macroeconomics, 2 Sir William Petty: National Income Accounting, 4 Richard Cantillon: Macroeconomic Modelling, 5 David Hume: The Classical Theory of Money, 6 François Quesnay: The Circular Flow of Income, 7 Anne Robert Jacques Turgot: The Importance of Capital, 8 Adam Smith: Land, Labour, Capital, and Social Cement, 9 Henry Thornton: The Lender of Last Resort, 10 Conclusion: New Ideas from Fascinating People. Years later, Marx was to follow the Ricardian In the end, the classical theory of demand for money may be summarised as under: (i) Money is only a medium of exchange. Second: Keynes’s Theory of Money: Liquidity Preference Theory • In 1936, economist John M. Keynes wrote his influential book, The General Theory of Employment, Interest Rates, and Money. P.3 Money 14 P.4 Expectation 16 P.5 Liquidity 20 APPENDIX TO THE PROLOGUE 24 1. In his opinion, if it was so then why the economy was facing Great Depression? Hume had strong views on the neutrality of money, particularly in the long term. case, yes, the pure neutrality result holds true, but not, it seems, in any other. lines Hume had argued. 1/P = C in the long run. However, the range of assets considered in this portfolio selection exercise differs conSiderably between the two. does not influence interest, but the growth of money stock does because banks are Hume's book, Political Discourses, consists mainly of essays—seven out of the twelve—on economic issues. and the real bills doctrine of Smith. These theoretical considerations involved serious changes as to the scope of countercyclical economic policy. rates. The Classical Theory: Why We Believe In It The classical theory of inflation attributes sustained price inflation to excessive growth in the quantity of money in circulation. Money, in their view, was simply gold, silver and other precious metals. Exchange Value of money itself is determined." In other words, are we sure that the increase in the money supply will have no other effects on any other long-run prices (e.g. capital not consisting of money...It is only during the interval of the issues of the traditional Quantity Theory with money-to-prices causaility and is almost on the verge of Monetary theory occupied a central place, and their achievements in this area were substantial to one another remain unaltered by money: the only relation introduced is to money ", (D. Ricardo, High Price of Bullion, change in the comparative demand for different goods, there would be a real alteration in The quantity theory of money takes for granted, first, that the real quantity rather than the nominal quantity of money is what ultimately matters to holders of money and, second, that in any given circumstances people wish to hold a fairly definite real quantity of money. by a rise in money supply. 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