The Quantity Theory of Money: Monetarism and Economic Cycles
The quantity theory of money posits that the quantity of money available in an economy is directly proportional to the price level. However, if monetarists believe in this theory, why do they think that money can still stimulate income and influence the economic cycle?
Monetarists believe that adjustments in the cash supply can impact financial actions and the business cycle. They assert that changes in the money supply influence overall interest rates, which in turn affect production and prices. By controlling the money supply, national banks aim to stabilize the economy and promote long-term growth. Furthermore, monetarists emphasize the importance of consistent and expected monetary policy to maintain price stability and reduce uncertainty, which they believe is beneficial for economic development.
Productivity and the Marketplace
Productivity is derived from providing goods and services to the market, which are then available for sale and adoption by others who use valid money as a medium of exchange. Only through such productivity can we achieve sustainable progress in the future. Monetarists liken the impact of liquidity in the real world to the effects observed in board games like Monopoly, where the creation and spending of money can stimulate economic activity.
The Contradictions of Expansionary Monetary Policy
Despite the power of expansionary monetary policies, there are also contradictions that arise. Monetarists believe that newly created money, when spent, stimulates economic activity in the short term. Yet, this is often followed by inflation and economic collapse. This pattern has historically plagued economies, such as the U.K., the U.S., and Western Europe since the Napoleonic wars.
The Effectiveness of Monetary Policy
Proponents of monetarism argue that the effects of monetary policy are difficult to predict and, consequently, should be used sparingly. While more than one school of monetary theory exists (such as the Currency School and the Banking School), the monetarist approach emphasizes the need for consistency and predictability in monetary regulations.
The Debate in Academic and YouTube Circles
The debate over monetary theory is not limited to academic circles. In various online platforms like YouTube, prominent scholars such as Tom Woods, a senior fellow at the Mises Institute, provide insightful explanations of the theory and its historical context. Woods and other experts explore the complex interplay between monetary policies and economic cycles.
For those seeking a deeper understanding, reading books by scholars such as Ludwig von Mises and Jesus Huerta de Soto is highly recommended. However, for a more accessible approach, watching explanatory videos on YouTube can greatly enhance understanding of these complex economic concepts.