Study Guide to Man, Economy, and State with Power and Market

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Chapter 11: Money and Its Purchasing Power 145 11. Monetary Attributes of Goods A. Quasi Money Some goods (such as jewels and high-grade debentures) are very liquid and hence function as quasi money. However, they are not actually money because they cannot be used to settle debts at par. Nonetheless, their high marketability raises their demand even further, and investment in them will carry a lower rate of return. B. Bills of Exchange Bills of exchange are credit instruments, not money substitutes. 12. Exchange Rates of Coexisting Money If there are two or more commonly accepted media of exchange, their exchange ratio will be such that no arbitrage opportunities are available in selling the moneys against other goods. This is termed purchasing power parity. For example, if an ounce of gold buys 1,000 DVDs while an ounce of platinum buys 2,500, then the equilibrium exchange rate must be 2.5 ounces of gold for 1 ounce of platinum. 13. The Fallacy of the Equation of Exchange The holistic approach to money is epitomized in the equation of exchange, MV=PT. This is an identity that states that the number of money units multiplied by the average rate of turnover (“velocity”), must equal the average price times the number of transactions. Apart from its lack of subjective marginal theory, there are grave flaws with this approach. The concepts of velocity and average price are completely empty; they are really just placeholders necessary to fill out the equation.
146 Study Guide to Man, Economy, and State with Power and Market 14. The Fallacy of Measuring and Stabilizing the PPM A. Measurement Money is not a measure of value. When someone buys a TV for $50, we cannot conclude that he “values it” at $50; on the contrary we know that he values the TV more than he valued the $50. All price indices are arbitrary. B. Stabilization In reaction to the wild swings of the PPM (caused by government), many economists propose various schemes to “stabilize” the PPM. Yet such proposals are undesirable and unworkable. In any event, if businesspeople really wanted to substitute a basket of commodities as the standard unit of account (rather than the money commodity), they could do so in their contracts. 15. Business Fluctuations Particular businesses may fail because of entrepreneurial misjudgment. But during the bust phase of the “business cycle,” we see evidence of widespread error. This cannot occur on an unhampered market; its explanation will be postponed until the next chapter. 16. Schumpeter’s Theory of Business Cycles Schumpeter’s explanation of the business cycle, though better than many others, suffers from its reliance on overlapping cycles, and it ultimately lays the blame on innovation. But Schumpeter doesn’t explain why there should be sudden clusters of innovation that trigger the boom-bust cycle.
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CONTENTS INTRODUCTION . . . . . . .
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In June of 2004, I became convinced
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Introduction ix appropriate, I have
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Chapter Summary In a money economy,
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Chapter 4: Prices and Consumption 4
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Chapter 6: Production: The Rate of
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Chapter Summary This chapter explai
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Chapter Summary Society is composed
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Chapter 4: Binary Intervention: Tax
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Apriorism, 1, 9 Ability-to-pay prin
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Index 251 Equilibrium, 47, 104 macr
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Index 253 Medium of exchange, 27, 3
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Index 255 See also Economy, Evenly
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